Globally synchronized monetary policy tightening has heightened recession risk, says RBI Governor Shaktikanta Das

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RBI Governor Shaktikanta Das

Photo: BCCL

New Delhi: The Reserve Bank of India has raised the key rate – the repo rate – by 50 basis points (bps) each in the previous three reviews, except for a 40bp increase in an off-cycle monetary policy in May. Not only the RBI, but the US Federal Reserve and the European Central Bank have also raised interest rates to keep inflation under control.
This synchronized tightening of monetary policy globally has gradually increased the risk of a hard landing, that is, a recession to control inflation, RBI Governor Shaktikanta Das said. He, however, said India was placed differently.
Das’ latest comment takes on even greater significance when considered in relation to UK Chancellor Jeremy Hunt’s acknowledgment that the country is in recession. Similar signs are seen across the US where big companies like Meta, Amazon, Twitter are laying off employees en masse amid recession fears. The ECB also said a recession in the 19 countries that use the euro has become more likely.

Speaking at the RBI on Saturday at the Department of Economic and Policy Research’s annual research conference, Governor Das noted that the world has been hit by three shocks since March 2020 – the pandemic, the war in Europe and the aggressive tightening of monetary policy across countries.

Policy responses must be swift and far-reaching to contain adverse effects on overall macro-financial conditions as well as sectoral vulnerabilities, he said. “While inflation in systemically important advanced economies has proven to be persistent rather than transitory, the third shock has taken the form of aggressive monetary policy tightening by the US Fed and relentless appreciation of the US dollar,” Das added.

“The synchronized tightening of monetary policy around the world has gradually increased the risk of a hard landing, ie a recession to bring inflation under control. India is however placed differently,” Das said. A recession is characterized by a shrinking economy.

The central bank has predicted a 7% growth for the Indian economy for the current financial year.

The RBI Governor also pointed out that the pre-pandemic world seems to be a distant memory, global growth momentum is waning and domestically we are experiencing a slowdown in growth.

“The main challenge was to understand the reasons for the observed decline in growth and to propose structural reforms and other policy changes. Domestic inflation, on the other hand, was brought down to 3.9% on average during the flexible inflation targeting regime,” Das said. At the same time, globally, widespread discontent with the negative fallout from globalization has led to a growing shift towards protectionist policies, challenging the prevailing wisdom of greater openness to maximize economic well-being. , he added.

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