Continued depreciation of the rupee will have an increasing impact on inflation

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- The various estimates put forward by the Reserve Bank may be tested in the near future

With the Indian economy and financial markets grappling with uncertainty at various levels, the Monetary Policy Committee of the Reserve Bank of India (IMAIN) has hiked the policy repo rate by 50 basis points to 5.9 percent. For this reason the Fixed Deposit Facility and Marginal Standing Facility rates have been adjusted accordingly.

Keeping in view the inflationary situation, the rates will need to be increased further. The extent to which the Monetary Policy Committee extends this in the current cycle depends on various factors, including money market movements. The Reserve Bank of India estimates that inflation will decline to 5.8 percent in the last quarter of 2022-23 and 5 percent in the first quarter of the next financial year. According to the monetary policy report, the RBI expects inflation to average 5.2 percent by 2023-24.

While this will still be above the 4 percent target, the RBI will have some policy room for adjustment. But given the current circumstances, the inflation rate is likely to remain above the permissible limit for three consecutive quarters. Therefore, failure to achieve the target will be considered.

While the Reserve Bank's inflation forecast for the year is broadly in line with market expectations, its growth outlook may be put to the test in the coming quarters. The full-year estimate has been marginally revised to 7 per cent from 7.2 per cent as growth in the April-June quarter was significantly lower than the Reserve Bank of India's estimate. In the process, it raised its growth forecast for the second half of the fiscal year to 4.6 percent, against the previous estimate of 4 percent. It is getting complicated. It can be argued that if the first quarter estimates were in line with the RBI's expectations, it would have had to revise the full-year forecast at a time when growth estimates around the world are coming down.

Global conditions will have a significant impact on results in the coming months. This is because geopolitical tensions show no sign of abating. Escalating tensions over the Ukraine war could not only affect commodity prices but also lead to risk aversion and tightening of global financial conditions. Meanwhile, the US The Federal Reserve may continue to raise interest rates. Which will affect capital inflows and currency valuation.

However, the RBI rightly said that policy is determined by local conditions, but continued depreciation in the rupee could affect the inflation outcome. It is noteworthy in this context that the strength of the dollar and the US Due to the rise in bond yields, forex reserves have declined by around 67 percent in the current financial year. Such a stressful situation will require adequate reserves and an emphasis on diversification, so global developments will need to be watched carefully over the next few months.

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