Trade musings 3 - This round for India's outlook

IMF released its quarterly world economic outlook on the 11th of October.  

The report predicts that "Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023." About the situation of inflation it says, "Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024." The report recommends continued monetary tightening, while supporting the low income vulnerable population. The risk factors continue to be inflation, geopolitcal tensions and wars, slowing global trade, Chinese property collapse, pandemic related disruptions etc.

The growth outlook for 2021, 22 and 23 are as follows: 

The above numbers make India the fastest growing large economy for the current year and the next year. 

It might be interesting to take a step back, and discuss the macro-economics and how India landed up at this sweet spot in terms of monetary and fiscal policy. It appears that India got something very right during the pandemic knowingly or unknowingly. 

The money supply during COVID: 

India dealt with the monetary stimulus differently during COVID when compared with USA or EU countries. A big part of the inflation that we see in USA and EU today is attributed on the loose monetary policy those countries ran during the pandemic. 

When the supply was constrained during lock-downs, increasing money supply led to more money chasing few available goods, causing inflation. The two plots below demonstrate the difference in approach between USA and India. Notice the jump in money supply during pandemic period for the USA. 

Source: Organization for Economic Co-operation and Development, M3 for India [MABMM301INM189N], retrieved from FRED, Federal Reserve Bank of St. Louis;, October 8, 2022.

Source: Organization for Economic Co-operation and Development, M3 for the United States [MABMM301USM189S], retrieved from FRED, Federal Reserve Bank of St. Louis;, October 8, 2022.

Most advanced economies such as EU, UK etc. that are suffering inflation have a money supply curve similar to USA.

A comparison of resulting inflation between India and USA is presented below: 

Global inflation is 9.8% today, a level unheard of in the the last 50 years. When the inflation emerged in the USA during late 2021 and early 2022, the inflation was attributed on the pent up demand from covid times. It was expected to subside by itself. 

However, it didn't. 

The central bank of US raised the rates in response starting March 2022 to counter it. And now almost all the central banks in the world have raised interest rates in the recent months. 

Tightening leads to rise in USD: 

When the world economy stumbles, the USD usually strengthens. Not because the USA does something amazing, but because the US T-Bills are considered the safest asset to move into during uncertain times. This explains why the USD appreciated during COVID. And it is again appreciating now, despite the fact that almost all the central banks are raising rates at similar speed. Most currencies have depreciated against USD, both in nominal (value) and real (purchasing power) terms. 

Look at the below figure on surge of USD from the IMF report:

Where does it go from here? 

It can go anywhere depending on the geopolitcal developments and response of central banks and governments. A continued tightening by Fed in the US can lead to serious recession. Russia may squeeze EU this winter and EU may implode and slow down further. Any deeper slowdown would affect our exports adversely. Our imports are inelastic in terms of petroleum and other products. Our exports are not. However, given our deep forex reserves it is certain that before India buckles, the world would already be in deep woods.

PS: Pay it like Crypto

Not everything is gloomy in Bengaluru: the startup city of India and my home. And if you fail at a crypto startup, you can start a tea-shop and accept payment in cryptocurrencies. And some people can pay in cryptos in Bengaluru. 

More on the crypto accepting tea-shop here


  1. Forthcoming situation and reasons spelt in simple terms🙏


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