The Ministry of Finance’s Monthly Economic Review report states that the growth process has been weakened due to heightened inflation and the tightening of monetary policy, and it is anticipated that these factors will continue to impede economic activity for a minimum of three years since the onset of the conflict between Russia and Ukraine in February 2022, which corresponds to the financial years 2022-2025.
“The slowing of global growth, accompanied by pressures from deglobalisation and supply chain disruptions, has also moderated global trade,” the finance ministry report said. In its April 2023 update, the IMF has attempted to clear the path of uncertainty and has projected global growth to decline from 3.4 per cent in 2022 to 2.8 per cent in 2023.
“Growth is forecasted to marginally improve to 3.0 per cent in 2024, but not enough to beat the growth rate of 2022 while falling significantly short of the 6.4 per cent mark attained in 2021.” Inflation in various advanced countries is way too above their target ranges which necessitated their central banks to constantly raise interest rates, which in the process hurt growth.
The increase of interest rates is a monetary policy tool that is generally utilized to reduce demand in the economy, consequently aiding the reduction of inflation rates and vice versa. The Reserve Bank of India (RBI) has raised the repo rate, the interest rate at which it lends money to banks, by a cumulative 250 basis points since May 2022 to combat inflation in the country. In the United States, the current interest rate stands at 4.75-5.00 per cent, a substantial increase from its near-zero level during the early stages of the pandemic.
The finance ministry report highlighted that the recent collapses of some banks in the US and Europe, attributed to the ongoing tightening cycle, raises significant concerns for policymakers regarding the vulnerability of their financial systems, particularly in emerging market economies (EMEs). Nonetheless, the report indicates that India’s banking system is relatively less susceptible to such incidents. Additionally, the finance ministry stated that the likelihood of rapid withdrawal of deposits is low, given that 63 per cent of deposits, primarily contributed by households, are considered to be stable.