The Federal Reserve’s latest 25 basis points hike in policy rate cannot be taken as a signal that the war against inflation, being waged by global central banks, is coming to an end. While the magnitude of the Fed’s rate hike is lower than in 2022, the Fed chairman has stated that future trajectory of the rate hike cycle will be driven by incoming data. He also drove home the message that monetary tightening will continue for some time, using the phrase ‘restrictive monetary policy’ multiple times.

The Fed remains steadfast in its effort to move the core PCE inflation, which is currently at 4.42 per cent, down towards the long-term target of 2 per cent. The European Central Bank and the Bank of England are also adopting an equally hawkish stance; both central banks hiked their policy rates by 50 basis points this week; with inflation ruling at multi-year high driving these moves. It is obvious that the inflation is going to be a consistent worry through this calendar with the IMF pegging global inflation at 6.6 per cent in 2023 and 4.3 per cent in 2024; the latter will still be above the pre-pandemic level of 3.5 per cent. With no end in sight to the Russia-Ukraine conflict and supply chain and labour force disruptions due to the pandemic yet to be resolved, there is still a mismatch between demand and supply, which central banks are addressing by dampening demand.

As the Fed chairman pointed out at the post FOMC press conference, consumer spending in the US is growing at a subdued pace due to tighter financial conditions, activity in mortgage sector is weakening due to high mortgage rates and capital investments by corporates have also slowed. The Fed is however unfazed by the deceleration in GDP growth to 1 per cent in the fourth quarter of 2022. The growth projections for the Euro area for 2023 are also extremely muted with the UK expected to be in a recession this year and Germany on the brink of one.

The documents of the recently presented Union Budget, too, have acknowledged that the global macro-economic woes of 2022 have now spilled over into 2023. While the Budget has pinned hopes on domestic demand, pick-up in capital investment, stronger corporate and bank balance sheets and digital advancements to drive the nominal GDP growth of 10.5 per cent for FY24, weak external environment does present a threat to these projections. With major central bankers resolving to continue restrictive monetary policy as long as inflation remains high, growth deceleration in these countries will impact India’s external trade, especially in services, inward remittances and portfolio and FDI flows. Besides, the impact of Reserve Bank of India’s rate hikes are also likely to cool domestic demand. The RBI will also have to take these headwinds into account while formulating its monetary policy for this calendar.