Days after the Reserve Bank of India ( RBI) hiked the repo rate for the first time in four years by 25 basis points to contain inflation, bad news is pouring in from all sides. Here are the four key developments.
i) Higher inflation numbers - Retail inflation or consumer price index (CPI ) has seen a jump, from 4.58 per cent in April to 4.87 per cent in May. Similarly, the wholesale price index (WPI) has shot up, from 3.18 per cent in April to 4.43 per cent in May. The CPI figure is way above the 4 per cent target (+-2 per cent ) of the RBI.
ii) Fed Rate - The US Federal Reserve has also increased the fed rate by 25 basis points. After almost keeping the rates at near zero level post 2008, the world's largest economy has been raising interest rates. There is more to come as the Fed will also start unwinding or trimming its balance sheet as they have accumulated huge stock of bonds through buyback programmes. This will also push up interest rates.
iii) European Union to halt easy money regime - The European Central Bank has also decided to halt the easy money regime by the end of this year. They will soon be back to normalisation of monetary policy. Interest rates eventually will go up.
iv) Higher current account deficit in India - The latest figures for current account deficit (CAD) are not very encouraging,. The CAD has reached 1.9 per cent of GDP in 2017/18. This is way above the 0.6 per cent of 2015/16. The projection for the next year is 2.5 per cent of GDP. A higher CAD will impact the rupee value against the US dollar as the equity market inflows are also slowing down in the last few months.
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