😯 The End of Inflation?
The RBI is indicating that India's inflation worries may now be over. Here's why.
If there's one thing economists around the world (and also us) have talked about nonstop in the last few months, it is inflation (you can read our articles about inflation here, here and here).
After all, what's worse than your money's value depreciating without any fault of your own?
But RBI Governor Shaktikanta Das has suggested that our time to worry about this money-eating demon may be coming to an end.
He believes that inflation will go back to normal levels (some inflation is actually good inflation) by the second half of FY22-23.
And this isn't some feel-good statement he has made to lull us into a fall sense of security.
There's solid reasoning behind this statement. Wondering what it is? ReadOn!
🛢️ Oil is Falling
One of the major reasons why everything around us had been super expensive was the rising oil prices.
Both crude and edible oil had been on a major roll in the past few months, skyrocketing to record-high prices due to the Russia-Ukraine war which caused supply concerns.
But they have both calmed down now.
Crude oil went below $100/barrel (it has risen a little bit since) its lowest since April.
Meanwhile, palm oil prices have declined 33%, crude soybean oil has declined 24% and crude sunflower oil has declined by 14%.
Wondering why you and I haven't seen a change in prices yet?
Because we import oil and these oil shipments are booked in advance. So, we're still getting prices at the old cost. But the government has mandated companies to reduce oil prices by Rs.15/litre very soon.
So, looks like we can finally afford to fry those pakoras!
And it's not just oil whose prices are falling. Other commodities like copper, wheat and precious metals are also declining.
This could be very good news for most countries, especially India which is a major importer, because falling prices mean no more inflation.
But why are oil and other commodities’ prices falling anyway?
Let's start with edible oil first. Edible oil prices had risen due to fears of short supplies in the global market, which caused Indonesia (the major exporter of edible oil) to ban exports (you can read our article about the ban here)
But Indonesia has now lifted the ban.
Plus, Ukraine has also commenced exports now using a different trade route.
So, there are no more supply fears.
And what about crude?
Well, crude oil is a different puzzle that responds weirdly not just to the actual demand and supply in the market but also people's emotions.
Right now, emotions have taken precedence over logic.
🧐 What’s Going On?
You see, countries around the world have been busy trying to control inflation.
For this, they are raising interest rates and soaking up all the extra money from the markets.
This means companies will have to pay more money to take loans and grow operations.
And the markets are worried that this may lead to a recession (or maybe even a stagflation).
If a recession comes, demand for oil will fall, because people will lose jobs and companies will decrease operations, and so on.
And if demand falls, oil supply in the market will exceed and prices will fall.
Ironically, this anticipation that prices will fall has already caused prices to fall even though supply is still somewhat tight.
Russia and China also have a role to play in this decline.
You see, earlier oil was rising because of supply constraints from Russia.
But EU countries have had enough of Russia's oil-based dominance.
They are so done with the whole situation that some like Germany have decided to fire up their old coal-powered stations, reducing the overall demand for oil.
And what about China?
The country's zero Covid policy has brought its economy to a complete standstill. So much so, that the world's No. 1 oil importer had reduced imports, causing serious worries about oil demand.
Though the country is now recovering and again ordering massive amounts of oil, analysts are still worried about future demand.
Thanks to all of this, oil is down.
What about other commodities?
Other commodities like copper are also down because of recession fears. You see, most metals are used in construction and manufacturing. If economic growth slows down, their demand will also go down.
So, we may have rid ourselves of inflation, but that's only because we are headed towards a recession.
However, many analysts believe that emerging markets like India won't really be impacted by the recession like the US.
They believe investors will be attracted by our cheap valuations1 and invest money here during a recession, boosting our economy.
But during the 2008 US recession, India had also been majorly affected so we cannot really guarantee this.
The RBI is currently not worrying about this recession though. It is still focused on reducing inflation. But it has said that its monetary policy will now be flexible. So, as soon as inflation reduces or the risks of recession rise, we could see interest rates being lowered once again.
But will that be enough to stave off a recession some feel has already arrived?
Only time will tell.
Stocks in emerging markets or developing economies are currently falling as the US’ central bank has raised interest rates. More people are now investing in the US to get higher returns and for that they are pulling money out of emerging markets like India causing our stocks to fall and making them a cheap buy.
⚡In a line: Our inflation worries could be temporarily over as commodity prices are falling but if a recession is coming soon we might have a bigger problem on our hands.
💡Quick question: Can India really avoid inflation and recession or are we already seeing a recession?
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