Inflation, policy tightening to weigh on global economic activity till 2024-25: Ministry of Finance report

New Delhi [India], April 25 : Elevated inflation and tightening of monetary policy have weakened the growth process and are expected to weigh on economic activity for at least three years since the conflict broke out between Russia and Ukraine in February 2022 (the financial year 2022-25), according to Ministry of Finance's Monthly Economic Review report.

"The slowing of global growth, accomped 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.

Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline and vice versa.

In India, RBI has so far raised the repo rate, the rate at which it lends to banks, by 250 basis points cumulatively since May 2022 in the fight against inflation. In the US, the interest rate is currently at 4.75.5.00 per cent, which was near zero during the initial days of the pandemic.

"Core inflation, however, in many major economies continues to be sticky, prompting faster-than-expected policy rate hikes by central banks," the report said.

Core inflation is the change in the costs of goods and services, barring those from the food and energy basket.

Further, about the recent collapses of a few banks in the US and Europe on the back of the ongoing tightening cycle, the finance ministry report said it posed pertinent questions to policymakers on the vulnerability of their financial systems, particularly in emerging market economies (EMEs).

However, the report stated that India's banking system is considerably less prone to such incidents.

"Banking supervision (in India) is robust with the RBI's overarching coverage of institutions, regardless of asset size, in its bi-annual assessment of financial stability. Macro stress tests are also performed from time to time on individual banks."

Also, the finance ministry said the rapid withdrawal of deposits is unlikely as 63 per cent of the deposits contributed by the households, are considered sticky.

"Further, as more than 60 per cent of deposits are held by public sector banks, depositors in India are reassured about the safety of their savings," it added.

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