Global economy to feel the heat of monetary policy tightening: RBI Bulletin

According to the Bulletin, debt distress is rising, with a surge in default rates and an appreciating US dollar.

The global economy will bear the brunt of past monetary policy actions in 2023, the Reserve Bank of India (RBI) monthly bulletin said on December 20.

"Emerging market economies (EMEs) appear even more vulnerable, having battled currency depreciations and capital outflows in addition to slowing growth and high inflation," Bulletin said.

Globally, central banks have been increasing interest rates to fight inflation.

RBI bulletin is a monthly publication that gives insights into the economic developments in both India and abroad.

According to the Bulletin, debt distress is rising, with a surge in default rates and an appreciating US dollar.

Looking beyond, a mild recovery is projected to get underway in most countries in 2024, the Bulletin said

"Emerging Asia will likely become the world’s engine of growth, collectively accounting for close to three-quarters of global growth in 2023 and around three-fifths in 2024," the bulletin added.

On December 7, the monetary policy committee of the RBI hiked the repo rate by 35 basis points in response to a modest downward shift in the projected trajectory of inflation, a dip in inflation expectations and indications that the economy’s resilience and growth foundations are improving.

This came after three consecutive policy rate increases by 50 basis points each. With the recent hike, the RBI has increased the repo rate, or short-term lending rate, by 225 bps since May. One bps is one-hundredth of a percentage point.

"The MPC decided that further withdrawal of accommodation is warranted 'to keep inflation expectations anchored, break the core inflation persistence and contain second-round effects, so as to strengthen medium-term growth prospects'," the bulletin said.

The bulletin added that if the projections set out in the resolution hold, then perhaps India is poised to achieve the first milestone in its price stability objective – bringing headline inflation enduringly into the tolerance band during 2023-24.

Yet, with inflation projected to turn up in the second quarter of next year, there can be no letting down of the guard.

The RBI Governor Shaktikanta Das in a monetary policy statement said that the main risk is that core inflation (CPI excluding food and fuel) remains sticky and elevated. Overall, the CPI price momentum remains high. Risks from adverse weather events add to uncertainty in the outlook.

Headline inflation is projected at 6.7 percent in 2022-23, with Q3 at 6.6 percent and Q4 at 5.9 percent. The risks are evenly balanced. CPI inflation for Q1:2023-24 is projected at 5.0 percent and for Q2 at 5.4 percent, on the assumption of a normal monsoon.

In its latest Economic Outlook released on November 22, 2022, the Organisation for Economic Co-operation and Development (OECD) has pegged global growth for 2023 at 90 bps below the forecast for 2022.

While, on the inflation front, OECD has projected that CPI inflation in the G20 economies is set to ease to 6.0 percent from 8.1 percent in 2022.

"Geopolitical risks, as well as tight supply-demand balance in key commodities, impart considerable uncertainty to the outlook," the bulletin added.