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economy | IST

Global macros and its impact on Indian economy: Experts see an upside risk to inflation

Mini

Sonal Varma of Nomura is of the view that particularly the higher energy costs, and the shortages do indicate some downside risks to growth and clear upside risk to inflation and so if this continues, then potentially next year is where we could see a bigger macro challenge for India.

The Indian and the global economy are suddenly beset with changed macros due to an unexpected accentuation of energy shortages sparking a sharp rise in commodities, especially fuel-related commodities. The IMF has lowered the global growth forecasts not India’s though. However, India as a raw materials consumer and a fuel importer also faces sudden challenges.
Expensive crude, rising US bond yields likely tapering of liquidity by the US and other central banks, and a stronger dollar. What does this mean for the Indian economy in terms of trade? What does it mean for India's financial markets? To discuss this in-depth, CNBC-TV18 spoke with two financial sector experts Ashish Parthasarthy, treasurer, HDFC Bank and B Prasanna, Treasurer, ICICI Bank and two economists Rahul Bajoria, Barclays and Sonal Varma of Nomura.
Varma said IMF's growth downgrade comes in the backdrop of a significant pickup in global goods demand, which has caused massive supply shortages, "So outside of the current energy crisis, we are seeing globally. We have been talking about chip shortages, ship shortages and labour shortages in the US. So the downgrade for advanced economies like the US has actually been because of supply shortages and it is not a demand slowdown. However, there are certain developing economies because of the pandemic where there has been a growth downgrade."
So, the rationale for the growth downgrade is important to flag because if it is more of a supply-side driven growth slowdown, then essentially it leads to a macro situation of higher inflation and lower growth. It is not technically stagflation, but it is stagflation type, Varma said.
She said, what the global backdrop means really is two things. One, the terms of trade for India are incrementally negative, which is a headwind for growth. The global financial conditions are also tightening, which is negative for growth, but I would say, on aggregate global financial conditions are still quite accommodative.
"I think particularly the higher energy costs, and the shortages do indicate some downside risks to growth and clear upside risk to inflation and so if this continues, then potentially next year is where we could see a bigger macro challenge for India," she added.
When asked if we would have to up inflation forecasts for FY23 and maybe even for FY22, Bajoria said, "As far as the forecasts are concerned, we are going into a period of sticky inflation. Even with the next three months, being relatively benign, given a combination of still-low food prices and base effects. We feel that by the end of this fiscal year, we will be back closer to about 6 percent headline inflation and beyond that also it will be a very gentle moderation period."
According to him, "We really have no choice but to take the pain of higher imported prices and that will have an impact on the cost of production. Now, the obvious question will be, do we see second-order effects. In certain sectors, we clearly are seeing second-order effects, but the overall pricing power remains relatively weak and this might give a little bit of room for the central bank to keep things in a relatively accommodative phase. But at the same time, the stickiness and inflation numbers are likely to remain a challenge to the 12-month horizon."
On inflation Varma said, "The global supply chain disruptions have lasted a lot longer than what we had anticipated, particularly now with a more broad-based rise in energy costs across oil, coal, natural gas, etc. the concern is that ultimately, the feedthrough from energy costs directly into logistic costs, higher cost of electricity, and particularly the past through that we will see to food inflation in the coming months is substantial. And this is happening at a time where, most of the other global commodity prices in terms of metals, etc, are also picking up and putting pressure on manufacturing margins. The reopening we are seeing in India is sort of adding to services inflation."