Posted in economics, MARKET ECONOMY

US Inflation at 8.6% in May 2022 Surges Past Four-decade High Record

Dr Debesh Roy, Chairman, InsPIRE

The U.S. consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. There has been no respite from the upward movement of retail inflation in the US since February 2021, which had a benign reading of 1.7% to 5% in April 2021, followed by a steady 5.3-5.4% during July-September, when the Federal Reserve Chair Mr. Jerome Powell was convinced that inflation was transitory in nature. However, October (6.2%) onwards inflation continued to rise unabated touching a 40-year high in March 2022, followed by a slight drop to 8.3% in April, before rising to 8.6% in May 2022 (see figure below). The core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.

High inflationary trend is a downside of strong growth in the US, sparked by low interest rates and government stimulus to counter the Covid19 pandemic’s impact, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis. Further, price pressures are strong across much of the US economy partly due to an unusually tight U.S. labor market, with demand for workers outstripping supply.

Source: U.S. Bureau of Labor Statistics

The rise in May inflation was driven partly due to sharp rises in the prices for energy (34.6%) from a year earlier, and groceries (11.9%). The surge in inflation belied hopes among some analysts about the nearing of peak inflation, primarily due to further rise in energy prices, as a result of the prolonged Russia-Ukraine conflict, and a steady rise in services-related costs, mainly those linked to the travel industry.

The US Federal Reserve seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Accordingly, the Federal Open Market Committee (FOMC) had decided to raise the target range for the federal funds rate to 3/4 to 1% at its May 04, 2022 meeting, while anticipating that ongoing increases in the target range will be appropriate. With the May inflation print at more than 40-year high, Ms. Lael Brainard, the vice-chair of the Federal Reserve, has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.

Posted in economics

IMF Downgrades Global Growth Projections

Dr. Debesh Roy, Chairman, InsPIRE

The International Monetary Fund (IMF) in its April 2022 edition of the World Economic Outlook (WEO) has projected the global economy to slow down sharply from 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. The projections are 0.8 and 0.2 percentage points lower for 2022 and 2023, respectively, made in the January 2022 WEO Update.

Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. The sharp cut in growth projections is the result of the humanitarian and economic impact of Russia-Ukraine war, and the sanctions against Russia imposed by the United States (US) and its allies. Crucially, the  projections by IMF assume that the conflict remains confined to Ukraine, further sanctions on Russia exempt the energy sector and the pandemic’s health and economic impacts weaken during 2022. Further, employment and output will remain below pre-pandemic trends through 2026, with few exceptions.

The IMF warns that unusually high uncertainty surrounds the growth forecast, and downside risks to the global outlook dominate—including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China from 8.1 per cent in 2021 to 4.4 per cent in 2022. Moreover, the war in Ukraine has increased the probability of wider social tensions because of higher food and energy prices, which would further weigh on the outlook.

The advanced economies (AEs) are expected to slow-down sharply from 5.2 per cent in 2021 to 3.3 per cent in 2022 and 2.4 per cent in 2023, as shown in the chart below. The US is expected to witness a sharp fall in growth from 5.7 per cent in 2021 to 3.7 in 2022 and 2.3 per cent in 2023. The Euro area, too, is estimated to slowdown from 5.3 per cent in 2021 to 2.8 per cent and 2.3 per cent in 2022 and 2023, respectively.

The growth of emerging market and developing economies (EMDEs) is expected to fall sharply from 6.8 per cent in 2021 to 3.8 per cent in 2022, but would rise to 4.4 per cent in 2023. The projected growth rates for AEs as well as EMDEs have been downgraded from the projections made by the IMF in October 2021 and January 2022, in view of the ongoing Russia-Ukraine war, disruption in global supply chains and unprecedented  world-wide inflationary situation.  

The IMF  downgraded India’s growth forecast for FY23 from 9 per cent estimated in January 2022 to 8.2 per cent, citing the impact of high oil prices on consumer demand and private investments. The forecast for India by the IMF is among the most optimistic so far. While the RBI lowered India’s growth projection for FY23 from 7.8 per cent estimated earlier to 7.2 per cent in the latest Monetary Policy Committee (MPC) meeting (06-08 April 2022), the World Bank reduced India’s growth forecast from 8.7 per cent estimated in January 2022 to 8 per cent, recently. However, India is projected to remain the world’s fastest-growing major economy by the IMF, the World Bank and the OECD. But we live in an uncertain world, and the actual growth could end up below the projections.

The IMF has identified the following five principal forces that would shape the near-term global outlook:

The war in Ukraine

The economic damage will lead to a significant slowdown in global growth in 2022 – a severe double-digit drop in GDP for Ukraine and an 8.5 per cent contraction in Russia, along with spillovers across the world through commodity markets, trade, and financial channels.

Monetary tightening and financial market volatility

Significant rise in inflation in major economies has led to tightening of monetary policy by central banks. This has contributed to a rapid increase in nominal interest rates across advanced economy sovereign borrowers. In the months ahead, policy rates  are generally expected to rise further and central banks would begin to unwind balance sheets in AEs and also in several EMDEs. Capital outflows from EMDEs have led to sharp fluctuations in the financial markets in these economies. Further, the financial markets across the globe have been experiencing sharp fluctuations due to the imminent rise in US Fed rates.

Fiscal withdrawal

Policy space in many countries has been eroded by necessary higher COVID-related spending and lower tax revenue in 2020–21. Faced with rising borrowing costs, governments are increasingly challenged by the imperative to rebuild buffers.

China’s slowdown

Deceleration in China’s economic growth has wider ramifications for Asia and for commodity exporters.

Pandemic and vaccine access

Restrictions have begun to ease as the peak of the Omicron wave passes and global weekly COVID deaths decline. The risk of infection leading to severe illness or death appears lower for the dominant Omicron strain than for others—especially for the vaccinated and boosted. The health and economic impacts of the virus are expected to start to fade in the second quarter of 2022.

Posted in CLIMATE CHANGE, Law and Policy

IPCC Assessment Report 2022: Mitigation of Climate Change

Bijetri Roy, Managing Director & Chief Strategy Officer, InsPIRE

On 4th April, 2022, the Intergovernmental Panel on Climate Change (IPCC) published their IPCC Assessment Report 2022 on Mitigation of Climate Change by Working Group III (WG-III).

The Working Group III report provides an updated global assessment of climate change mitigation progress and pledges, and examines the sources of global emissions. It explains developments in emission reduction and mitigation efforts, assessing the impact of national climate pledges in relation to long-term emissions goals.

Let’s look at the key highlights of this report:

2010-2019: Average annual GHG emissions at highest levels in human history

As per the report, GHG emissions were 54% higher in 2019 than in 1990, however, the growth is slowing down. Global net anthropogenic GHG levels are at 59 GtCO2e. Average annual rate of growth has slowed to 1.3% per year in 2010-19 as compared to 2.1% per year during 2000-09.

At least 18 countries have reduced their GHG emissions for more than a period of 10 years through various measures like energy efficiency, decarbonization and reduced demands for energy.


Current Nationally Determined Contributions (NDCs) are insufficient

Current pledges to the Paris Agreement are insufficient and emissions must fall 43% by 2030 compared to 2019. Unless there are immediate and deep emissions reductions across all sectors, 1.5°C is beyond reach.

Increased evidence of climate action

There is an increased evidence of climate action. LDCs have emitted only 3.3% of global emissions in 2019, but carbon inequality still prevails with the average per capita emissions in 2019 being 1.7 tCO2e, as compared to the global average of 6.9 tCO2e.


In some cases, costs for renewables have fallen below those of fossil fuels


Electricity systems in some countries and regions are already predominantly powered by renewables


Limiting warming to 1.5 °C

Global GHG emissions peak before 2025, reduced by 43% by 2030. Methane reduced by 34% by 2030. (based on IPCC-assessed scenarios)

Limiting warming to around 2°C

Global GHG emissions peak before 2025, reduced by 27% by 2030. (based on IPCC-assessed scenarios)


The temperature will stabilize when we reach net zero emissions


There are options available now in every sector that can at least halve emissions by 2030


⎻ Major transitions are required to limit global warming
⎻ Reduction in fossil fuel use and use of carbon capture and storage
⎻ Low- or no-carbon energy systems
⎻ Widespread electrification and improved energy efficiency
⎻ Alternative fuels: e.g. hydrogen and sustainable biofuels

Demand and services

⎻ Potential to bring down global emissions by 40-70% by 2050
⎻ Walking and cycling, electrified transport, reducing air travel, and adapting houses make large contributions
⎻ Lifestyle changes require systemic changes across all of society
⎻ Some people require additional housing, energy and resources for human wellbeing


⎻ Reducing demand and low-carbon technologies are key to reducing emissions
⎻ Electric vehicles: greatest potential
⎻ Battery technology: advances could assist electric rail, trucks
⎻ Aviation and shipping: alternative fuels (low-emission hydrogen and biofuels) needed
⎻ Overall, substantial potential but depends on decarbonizing the power sector

Carbon Dioxide Removal

⎻ Required to counterbalance hard-to-eliminate emissions
⎻ Through biological methods: reforestation, and soil carbon sequestration
⎻ New technologies require more research, up-front investment, and proof of concept at larger scales
⎻ Essential to achieve net zero
⎻ Agreed methods for measuring, reporting and verification required

Policies, regulatory and economic instruments

⎻ Regulatory and economic instruments have already proven effective in reducing emissions
⎻ Policy packages and economy-wide packages are able to achieve systemic change
⎻ Ambitious and effective mitigation requires coordination across government and society

Technology and Innovation

⎻ Investment and policies push forward low emissions technological innovation
⎻ Effective decision making requires assessing potential benefits, barriers and risks
⎻ Some options are technically viable, rapidly becoming cost-effective, and have relatively high public support. Other options face barriers
⎻ Adoption of low-emission technologies is slower in most developing countries, particularly the least developed ones

The evidence is clear: The time for action is now

Posted in economics

Strong Global Recovery on the Cards: India Set to Regain its Numero Uno Position

Bijetri Roy, Managing Director & Chief Strategy Officer, InsPIRE

The OECD, in its interim report for September 2021, has projected a strong, but uneven global growth in the years 2021 and 2022 (Charts 1 and 2). Government and central bank support and progress in vaccination would lead to growth above the pre-pandemic level. With countries emerging from the crisis facing different challenges, the growth would remain uneven.

Wide differences in vaccination rates between countries and emergence of new variants of the virus have restricted the opening up of economies and affected the supply chains. Output and employment gaps continue in many countries, especially in emerging-market and developing economies (EMDEs), where vaccination rates are low.

Estimates by OECD indicate that global GDP would grow at  5.7% in 2021 (Chart 1), followed by 4.5% in 2022 (Chart 2). The GDP has now surpassed its pre-pandemic level, but output in mid-2021 was still 3.5% below the projection made before the pandemic. This indicates  a real income shortfall of over $ 4.5 trillion (in 2015 PPPs). It is, therefore, imperative to close this gap to minimise long-term damage to the global economy from the pandemic through job and income losses.

G20 countries are expected to grow at 6.1% in 2021 (Chart 1) and 4.1% in 2022 (Chart 2), mainly driven by high growth in India (9.7%), China (8.5%), Turkey (8.4%), and Argentina (7.6%) in 2021. The year 2022 could witness a slower, although a stable growth due to pick up in investments and consumption, without the benefit of base effect. Growth in GDP in 2022 is expected to be influenced by India (7.9%), Spain (6.6%) and China (5.8%).

As indicated by high-frequency activity indicators, such as the Google location-based measures of retail and recreation mobility, global activity continued to strengthen in recent months, helped by improvements in Europe and a strong rebound in India and Latin American countries.  

India is set to regain its position as the fastest growing economy in the world.  According to OECD, India is expected to grow at a real GDP of 9.7% in 2021-22 (Chart 1), albeit from a low base. However, the Indian economy is expected to get on track to a long-term high growth trajectory, with a brisk growth of 7.9% in 2022-23 (Chart 2).

The Q1 (April-June 2021) GDP figures, the latest core sector growth data and recent positive high frequency activity data, indicate that the economy is gaining traction. Standard & Poor’s has also highlighted in a recent Asia Pacific report that India’s growth in GDP would  make a strong rebound in the July-September 2021 quarter, but warned against the impact of faster than expected tapering by the US Federal Reserve, causing capital flow risks as monetary policy by Reserve Bank of India (RBI) remains accommodative with real rate of interest in negative territory.

However, tapering by US Federal Reserve is expected to be gradual and EMDEs like India may not face an adverse situation similar to the taper tantrum of 2013. Moreover, India’s economic fundamentals are getting stronger, and the country could grow at a faster and more sustainable rate.

The Chinese economy is showing signs of a slowdown in economic growth. Troubles are brewing in the real estate and energy sectors in China. The country is facing an energy crunch due to shortages of coal for power generation, forcing it to increase purchase of natural gas. China’s power demand increased by 15% during the current year, but its domestic supply of coal – the largest source of power generation in the country – grew by just 5%. The Evergrande crisis has shown the fragility of the real estate sector in the country. If that is not all, the Chinese government’s recent crackdown on large corporations could impact investment and growth adversely.

*India’s data is for the  fiscal year 2021-22 
Source: OECD Economic Outlook, Interim Report September 2021
*India’s data is for the fiscal year 2022-23 
Source: OECD Economic Outlook, Interim Report September 2021.

The global economy continues to be in a state of flux. There is ample evidence to suggest that the supply shock reverberating around the world, combined with outbreaks of the Delta variant of corona virus, is tempering the recovery in growth. Results of business surveys from the US, UK and Eurozone suggest that economic activities have slowed down as delivery times grew longer and backlogs built up.

Policy Measures to Support Global Growth Prescribed by OECD

Governments need to ensure deployment of all resources necessary to accelerate vaccinations throughout the world to save lives, preserve incomes and control the virus. Also, there is need for stronger international efforts to support vaccinations in low-income countries.

Continuance of macroeconomic policy support, with the mix of policies contingent on economic developments in each country.

Maintenance of accommodative monetary policy, with a clear guidance about the horizon and extent to which any inflation overshooting will be tolerated.  Also, there needs to be a clear  roadmap towards normalisation of monetary policy.

Fiscal policies should remain flexible and contingent on the state of the economy.

Credible fiscal frameworks that provide clear guidance about the medium-term path towards debt sustainability, and likely policy changes along that path, to help maintain confidence and enhance the transparency of budgetary choices.

There is a need for stronger public investment and enhanced structural reforms for boosting resilience, and improving the prospects for sustainable and equitable growth.

Posted in economics, Financial Markets

US Federal Reserve Prepares to Taper in November

Dr Debesh Roy, Chairman, InsPIRE

The Federal Open Market Committee (FOMC) at its meeting held on 22 September 2021, unanimously decided to maintain the rate of interest paid on reserve balances at 0.15% and also to continue with the federal funds rate in a target range of 0-0.25%, continuing with the accommodative stance.  While the FOMC decided for now to continue with quantitative easing (QE) of $120 bn-a-month asset purchase program, the Fed Chair Mr. Jerome Powell made it amply clear that “tapering” of the program could be initiated at the next FOMC meeting in November 2021.

The stimulus package was introduced at the onset of the pandemic, and the US Federal Reserve pledged to maintain it until there was substantial progress on its dual goals of average 2% inflation and maximum employment. The Fed believes that the US economy would be on a firm footing on these two counts, and would, therefore start the tapering exercise. Mr. Powell also revealed that the FOMC broadly supports a gradual tapering and intends to withdraw the stimulus entirely around the second half of 2022.

There is however, less unanimity among Fed members regarding tightening of interest rates, as the eighteen-member Committee is now evenly split on the prospects of a rate increase in 2022. There could be three rate hikes by the end of 2023.

Impact of Taper Decision by US Fed on Emerging Market and Developing Economies (EMDEs) like India

Financial markets globally, including India’s seem to have factored in the imminent gradual tapering exercise by the US Federal Reserve. Indian markets continued to surge, in spite of the almost certain tapering from November 2021. QEs with near zero interest rates in developed countries, led to massive flow of funds to emerging market economies.

The 2013 tapering by US Fed in the aftermath of the Global Financial Crisis, led to what is known as “taper tantrum”. In response to the statement by the then Fed Chair Dr. Ben Bernanke in May 2013, suggesting that the FOMC might soon start to slow down its bond purchases, the US 10-year bond yield surged and triggered a wave of capital flight from emerging economies. The countries affected the most from the “taper tantrum” were South Africa, Brazil, India, Indonesia and Turkey, which were dubbed the “fragile five” by Morgan Stanley due to their high current account deficits and dependence on inflows of foreign capital.

However, the situation is vastly different now, and “taper tantrum” can be ruled out in India. Foreign Institutional Investors (FIIs) have invested $8.94 billion in India so far in 2021. The Sensex and Nifty have gained 23-25% during the year. The effect of the tapering would be relatively low for India’s markets due to strong fundamentals, with a low current account deficit and a high and steadily growing foreign exchange reserves, which have touched a comfortable $640 billion (as on 17 September 2021). While high inflation is a problem, it is transient in nature, as underscored by the Reserve Bank of India.  

The EMDEs must certainly remain vigilant and take necessary monetary and fiscal measures to prevent taper to turn into a “tantrum” to cause any major outflow of liquidity from these economies.

Posted in economics

Evergrande Crisis in China

Bijetri Roy, Managing Director & Chief Strategy Officer, InsPIRE

Crisis ridden Evergrande is one of China’s largest real estate developers and is also the most indebted. The crisis has raised alarm bells across the globe. Financial Times has reported that the company used billions of dollars raised by selling wealth management products to retail investors to plug funding gaps and even to pay back other wealth management investors. It is also reported that Evergrande financial advisers marketed the products widely, including to homeowners in its apartment blocks, while its managers persuaded subordinates to invest.

Evergrande owes money to thousands of retail investors along with banks, suppliers and foreign investors, who fear they will not be repaid if the property group collapses. The Rmb 40 billion of wealth management products of Evergrande is dwarfed by its total of liabilities of Rmb2 trillion (USD 310 billion) (Source: Financial Times).

Evergrande’s total debt exposure (USD 310 billion)  includes USD19 billion in offshore dollar-denominated bonds. The group has expressed that it might default on USD 80 million worth of interest payments due within a week. This would not only  have ripple effects within China but the global economy as well. There are 128 banks and about as many financial institutions have direct exposure to Evergrande. A large number of these institutions could take big hits if the company collapses, sending shock waves across global markets. A tightening of controls by the People’s Bank of China and a weakening of housing demand has resulted in this crisis.

There is a view among a section of experts that the crisis is reminiscent of the Lehman crisis of the US in 2008, which triggered the Global Financial Crisis. However, a contrarian viewpoint is gaining support. According to a team at Barclays led by Ajay Rajadhyaksha, the two crises could not be more different. They argued: “the property sectors’ linkages to the financial system are not on the same scale as a large investment bank, but the debt capital markets are not the only, or even the primary, means of funding. China is to a large extent, a command-and-control economy. In an extreme scenario, even if the capital  markets are shut to all Chinese property firms, regulators could direct banks to lend to such firms, keeping them afloat and providing time for an extended ‘work-out’ if needed.

The only way to get a widespread lenders’ strike in a strategically important part of the economy would be if there were a policy mistake, where the authorities allow the chips to fall where they may (perhaps to impose market discipline), regardless of the systemic implications. And we think that’s very unlikely; the lesson from Lehman was that moral hazard needs to take a back seat to systemic risk. We don’t mean to imply that China has succeeded in suspending the laws of economics. If an asset can’t fully service the underlying debt, it of course matters. But the economics can show up through either a one-time (violent) balance sheet adjustment – aka a financial crisis – or through many quarters of income statements (a debt bubble being deflated).

We also don’t mean to suggest that China could never have a Lehman moment. But with the banking system likely to be pressed into service as a funding source in the event of real stress, China would likely face a ‘true’ financial crisis only if its banks had funding problems. This risk was high in 2015, when the country saw over a trillion dollars of capital flight, meaning there was something of a ‘run’ on the domestic financial markets as a whole”. (Source: Financial Times).