Volatility seen in financial markets around the world

- Monetary conditions eased largely, even as the Fed signaled interest rates to remain high

Ahead of the final policy review for 2023 by the Reserve Bank of India's Monetary Policy Committee, it was widely expected that policy rates and policy stance would remain unchanged. The committee took the right decision not to surprise the market and the year ended satisfactorily. In fact, 2023 turned out to be a better year than expected. However, the current year has been full of uncertainty.

Inflation rates were very high in developed countries and central banks were struggling to deal with it. It was not clear how long inflation would remain at elevated levels in some developed countries or what effect continued monetary policy tightening by major central banks would have on markets.

It may be noted that due to monetary tightening by major central banks, there was a lot of instability in the world financial and currency markets. Especially with the actions of the Federal Reserve in 2022. Now that 2023 is about to end, inflation rates in developed countries may be higher than the target but have come down significantly. Although the Federal Reserve has signaled policy interest rates will remain high for longer, monetary conditions have largely eased.

Performance in the growth sector has also been better than expected. America is not yet in recession, while India's growth numbers have been better than expected. In such a scenario, financial markets were more curious about the Monetary Policy Committee's revised growth forecast. The recently released GDP data for the second quarter of the current fiscal shows that the economy grew by 7.6 percent. Thus, the growth rate in the first six months of the financial year was 7.7 percent. According to the revised data of Sambha, the growth rate for the entire year may be seven percent.

The committee estimates that the economy will grow by 6.5 percent and 6 percent in the third and fourth quarters. It is also estimated that the growth rate may be 6.5 percent in the first half of 2024-25. If the growth rate can be kept at this level next year, it will be considered commendable.

On the inflation front, the Monetary Policy Committee estimates that rates will average 5.4 percent in the current fiscal year. While rates will remain above the target this year, the committee estimates that it will fall to four per cent in the second quarter of 2024-25 and rise again to 4.7 per cent in the third quarter. Inflation rates are falling across the world and core inflation is also easing. In such a situation, rising food prices can become a challenge.

Headline inflation is expected to remain high in November and December as vegetables remain expensive. The Monetary Policy Committee will keep an eye on this, which makes sense as the increase in vegetable prices is not sustainable. The real concern should be food prices.

The government has banned exports of many items, which has helped curb inflation, but prices may remain high due to seasonality in production. Overall, while global factors such as geopolitical tensions remain a threat to the Indian economy and global growth is likely to remain below trends over the medium term, the risks to financial markets have reduced significantly.

In fact, the forecast for the next few quarters is better than the past few years. Policy changes will also have an impact on local outcomes. Which will be seen before and after the 2024 Lok Sabha elections.