Tightenings...

Both, the US and INDIA are now almost on the path of rate hike as far as inflation targets are concerned, both are trying to bind themselves with the inflation targeting framework objectives, when inflation is near the upside target in the face of higher global oil prices and rising borrowing costs and expectations which is likely to cut down the expansion of business cycles in the two economies and global growth limiting prices and growth and expectations lower than their potentials, which could push the economies back to recessions and slowdown if people do not follow the central bank signals and inflation perks leading to tightening in the neutral real rate of interest and sudden reversal of a neutral stance on the interest rate in a  tightening cycle and expectations of an impending recession, a period of high unemployment and lower prices needing to cut the neutral real interest rate and expectations and increase demand supply investment employment and prices and growth and expectations.

Nonetheless, the RBI has maintained a neutral stance, despite a rate hike, depending on the incoming data, mainly on the effects of higher oil prices and higher MSP effects which is likely to increase rural demand and industry demand and growth. The insufficient level of private investment and production and ineffective distribution of labour to sectors like oil, which has been an unequivocal source of inflation in the economy, have caused higher interest rate and expectations, apart from food that faced ineffective supply mechanism and higher costs. Had INDIA created an excess reserve of oil during low prices, it could have handled higher oil prices and inflation much better. 

Moreover, higher interest rate and interest rate expectations, due tightening in the US and capital outflows and depreciation and expectations have increased uncertainty for private investment that is still trying to recover from the last slowdown and is also marred by the NPAs of the PSBs and the private sector (businesses), the twin balance sheet problem has held back investment in the economy, even though the government has allowed foreign investments and employment creation in the economy. 

Since, INDIA has not been much dependent on exports for growth, the trade wars would have a little effect on the economy, but to create employment and achieve the double digit growth rate INDIA needs to find its right place in the global supply chain and value addition by increasing economy’s competitiveness and productivity to lower prices and increase demand through innovation. 

The US too has maintained a tightening approach through a series of gradual rate hikes due to a stable outlook on the growth and unemployment in the expectation that tightening in the labour market would also increase wage inflation and inflation or general price level in the economy and the Fed would hike to achieve the neutral real interest rate and avoid inverted yield curve that signal looming recession.

But, with a credible monetary policy communication to control spending, both, consumption and investment through rate hikes and expectations could help to control inflation and inflation expectations only to an extent after which it increases unemployment. 

Nonetheless, a sudden or too much tightening to reduce unemployment could significantly lower price and growth expectations, which nobody wants, but lower prices might help increase demand if real wages and wage expectations increase through tight labour market, higher interest rates would make spending costly thereby reducing it.