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of 2011, the global economy has
slowed down considerably. On 20th
Sept ’11, the International Monetary
Fund (IMF) unveiled the World
Economic Outlook (WEO) where it
said that growth, which had been
strong in the year 2010, decreased in
the year 2011.
The IMF forecasted world growth to
be about 4% in 2011 and also 4% in
2012. This is down from 4.5% for
both years that the IMF had predicted
in April.
“Now, 4% may not sound too bad,
but, again, the recovery is very
unbalanced,” Olivier Blanchard,
International Monetary Fund’s
Economic Counsellor and Director of
Research Department said at the
WEO briefing.
“For the year 2011, we see growth of
6.4% for emerging market countries,
which is a good number. But only
1.6% for advanced economies,”
Blanchard added.
With uncertainty being the name of
the game across the global markets
the sharp increase in financial
volatility has been prevalent for some
time now.
“What has happened is that the
markets have become more sceptical
about the ability of policymakers to
stabilize the government’s public
debt,” explained IMF’s Economic
Counsellor Blanchard.
Worries have spread from countries at
the periphery of Europe, to countries
in the core of Europe, and then to
other nations. Even economies like
Japan and the United States of
America have not been spared.
Worries about sovereigns have
translated into worries about the
banks that are holding these sovereign
bonds, mainly in Europe. And these
worries have resulted in a partial
freeze of financial relations with
banks that are keeping high levels of
liquidity as well as tightening
monetary lending.
A day after the WEO, the IMF issued
its Global Financial Stability Report,
where José Viñals, IMF’s Financial
Counsellor and Director of the
Monetary and Capital Markets
department said that since IMF’s
previous report, financial stability
risks have increased substantially,
reversing the progress that had been
made over the previous three years.
“So we are back in the danger zone,”
said Viñals.
As we have moved into a new
political phase of the crisis, several
shocks have recently buffeted the
global financial system, including
unequivocal signs of a broader global
economic slowdown, the French
market turbulence in the Euro zone
and not to forget the credit downgrade
in the US.
“This has thrown us into a crisis of
confidence, which is being driven by
three main factors: weak growth,
weak balance sheets and weak
politics,” maintained Viñals.
“Developments in the global
economy over the past few weeks are
a matter of serious concern,” said the
RBI. Growth momentum is
weakening in the advanced
economies amidst heightened
concerns that recovery may take
longer than expected.
“Although India’s exports have
performed extremely well in the
recent period, this trend is unlikely to
be sustained in the face of weakening
global demand,” the Reserve Bank of
India warned.
“This, combined with the slowing
down of domestic demand, to which
the monetary policy stance is also
contributing, suggests that risks to the
growth projection for the year
2011-12 made in the July review are
on the downside now,” said the RBI.
But global factors have already
pushed the Indian rupee to a
28-month low at 49.90 a dollar and
also drawn the RBI to step in and
intervene in order to stem the rupee’s
free-fall, which shed nearly 5%
against the US dollar in just 10
trading sessions.
The gravity of the situation is justified
by the fact that the RBI did not
intervene in the foreign exchange
markets for nine successive months
until July.
Subir Gokarn, Deputy Governor of
the RBI, during his visit to the US,
informed a television channel that
volatility in the currency exchange
rate had become ‘a part of the game’
and the central bank would intervene
to the excessive volatility in the
currency under control.
But in the middle of moderating
growth, higher interest rates and
stubborn inflation, a volatile Indian
rupee would simply augment the
woes of the RBI as much as to that of
India Inc.
And for the monetary policy in the
ensuing quarters, the central bank’s
action will depend heavily upon a
host of ‘known unknowns’ like
further developments in domestic
growth and inflation dynamics,
developments in the global financial
situation as well as movement of
commodity prices at the international
level, to mention a few.
In all probabilities, the wider market
expectation of aggressive monetary
policy easing, beginning this year,
appears to be thoroughly misplaced
for the momenT.
Beyond Market 10th Oct ’11 It’s simplified... 11