News Briefs | Angle
The Age of Inflation
Rising interest rates are here to stay worldwide but India will find it easier to adapt
Madhavankutty Pillai Madhavankutty Pillai 24 Mar, 2023
THE FINANCIAL WORLD moves together in this era. A big event anywhere is reflected in all markets because everything is intertwined. If there is a war between Ukraine and Russia, then the price of oil and foodgrains shoot up in the opposite side of the globe. And if the Western world, for mistakes all of their own making, is going to be hit by massive inflation in the coming future, India will not escape either.
On March 22, the Federal Reserve of the US again increased interest rates by 0.25 per cent in keeping with its recent trend. But this one was laced with desperate irony because it is a solution that has disaster written into it. The US has a banking crisis now, as signalled by the collapse of the Silicon Valley Bank. This is a direct consequence of interest rates moving up. For decades, they were artificially kept to near-zero levels and banks used to pay very little to depositors. Now, they don’t have that ease of doing business. Depositors can just take it out and put it into something equally safe that pays more, like government bonds. Meanwhile, banks have their money tied up for the long term at lower interest rates and don’t have enough if a lot of depositors come calling together for an exit.
To contain the crisis, the US government is signalling that they will guarantee bank deposits, but where do they get their money from? They already have record debt levels and will just have to print more, which leads to inflation. And the Federal Reserve, by still increasing rates as it just did, makes the stress even greater on banks. A similar crisis is playing out elsewhere in the West too. And so, these countries which have had no experience of inflation for a long time will now have to just learn to live with it.
India will also bear the brunt. It has to keep raising interest rates in tandem. For example, if the rates are high in the US and low here, then there is no reason for foreign institutional investors to invest or keep their money in India. The Reserve Bank of India has also been consistently raising rates. This has fallouts. If you have a home loan which you took at 7 per cent and now it is 9 per cent, then that’s more of your salary being eaten away. If rates keep going up, at some point you just can’t pay the EMI. Similarly, companies which have a lot of loans on their balance sheet will find it hard to turn a profit. Those that were planning to expand using loans will rethink.
The saving grace for India is that we are used to inflation. It is not a shock to the system and we can adapt faster. The Western nations have no such luxury. They propped a low-interest regime for so long that they have neither the experience nor the will to meet it. Unlike in the past, they can’t push the problem further down the road either because the tipping point is here.
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