A Look Back

It will be recalled that the extent of policy response was quite different from country to country over 2020-22.

By: Suyash Chaudhary
Head, Fixed Income, IDFC

Many developed market (DM) economies were very aggressive in their macro policy response. As an example, in the US fiscal deficit expanded very sharply for two consecutive years with a significant portion of this involving direct cash transfers to people. This, accommodated with extensive monetary easing, sowed the seeds for the current dis-equilibrium being faced in that economy. In contrast many emerging markets (EMS) including India were much more nuanced in their fiscal and monetary responses, partly respecting the fact that they didn't have the privilege of printing 'reserve currencies' of the world.

However, the distinction was largely lost over 2022 as existing supply constraints met with the commodity shock from the Russia-Ukraine war. This led to inflation turning into almost a global problem. Central banks almost across the world responded with aggressive rate hikes. Net commodity importing EMs like India were faced with a particularly tricky terrain. Our external account faced dual pressure from higher commodity prices as well as capital outflows. RBI responded proactively both with timely removal of monetary accommodation as well as deft handling of currency intervention. However, many in the market then had started pricing in an aggressive rate hike cycle for India given the pressures as described here.