Each temporary escape has a permanent price,
neither drink nor love
will see you through.
~Bukowski
Without an iota of doubt, the second wave of the pandemic has resulted in a devastating loss of lives and livelihoods in our country. The country possibly is witnessing its toughest times since Independence.
The frontline healthcare workers have been working tirelessly for over 15 months now, battling more than just fatigue and infrastructural shortcomings. Complementing the brave efforts of the healthcare workers, the monetary authorities have also brought in a slew of measures to ease the burden on businesses, markets, and individuals.
RBI has adopted an easy monetary stance for over a year now, to allow for cheaper borrowing and increased money supply. Targeted assistance to depressed sectors has brought in much-needed revival.
Though the measures are the need of the hour, the economy will start emerging from the ashes in a couple of months. And with the beginning of revival starts a new battle for the monetary authorities.
There is a need for a smooth transition from the war-like scenario to the days of peace to prevent further shocks, given we can’t really afford to take anymore. It will all come to as Robin Scherbatsky would say timing.
Inflation
The immediate challenge for the monetary authorities is to stabilize inflation, with the millions struggling to keep their jobs. Persistent expectations of high inflation could lead food prices to shoot up and trouble the population at large. Middle-class savers too will be concerned, with the value of their savings eroding due to low-interest rates.
Taper Tantrums
Though RBI has induced additional liquidity into the economy by lowering rates and purchasing G-Secs, there will come a time where the excess liquidity could lead to financial markets crashing.
The 2013 US Taper Tantrum is fresh in everyone’s minds. And it is expected to be back again. Indian government and RBI have to be wary of rising bond yields when easing the accommodative measures.
For the uninitiated, taper tantrums are panic reactions by markets when governments decide to roll back economic measures to a pre-crisis scenario. The pace of purchase of government securities is reduced slowly for about a year. Investors speculate the interest rates to rise and pull out money overnight to invest in foreign markets. This sudden exchange of large amounts of money can erode the value of a local currency.
Impossible Trinity
RBI is confronted with a classic case of the impossible trinity, that is, an economy can't have free capital flows, fixed exchange rates, and stable inflation rates at the same time.
With India having a huge current account surplus and capital flows, the rupee may be in a scenario where it is greatly overvalued. So to fix the foreign exchange rates while having free flows, the economy may need to face the brunt of inflation.
All in all, the picture seems bleak for now and in the near future. Prudent measures and listening to the right people may help the economy to recover with just a few scars. Else, it will all be up to the ‘hand of God’.
