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Fiscal–Monetary Interface and Green Bonds
If the Reserve Bank of India hikes the policy rates against the backdrop of the mounting geopolitical risks and infl ationary pressures, the growth recovery process may slow down. At the same time, keeping the status quo on policy rates for a prolonged period could catalyse the de-anchoring of infl ationary expectations. The Union Budget 2022–23 has accommodated high fi scal defi cits and has emphasised on “crowding-in” effects of public infrastructure investment. The intensity of global macroeconomic uncertainties on economic recovery in India can be lessened through sustainable fi scal and monetary policy coordination.
The views are personal. Thanks are due to Rohit Dutta for research assistance.
The Union Budget 2022–23 was presented in Parliament prior to the mounting geopolitical risks of war in Ukraine. How these global macroeconomic uncertainties impact the fiscal arithmetic in India depend on how the fiscal–monetary policy interface to respond to the crisis. The recent omicron wave is also a reminder that the ever-mutating COVID-19 would continue as a determinant of macroeconomic uncertainties. Globally, several central banks have begun monetary policy normalisation by reducing their balance sheets by ending asset purchases and also through an “earlier than expected” hikes in policy rates (Roubini 2022). The financial markets in emerging economies have turned volatile indicating strong capital flight, with mounting uncertainty on the potential rate hikes by the United States (US) Federal Reserve.
The Reserve Bank of India (RBI) in the Monetary Policy Committee (MPC) deliberations during 8–10 February 2022 has delayed the normalisation procedure by maintaining a status quo policy rate at 4% (RBI 2022). However, when inflation is rising, a slower policy tightening by the central bank could accelerate the de-anchoring of inflation expectations, further exacerbating stagflation (Roubini 2022; Chakraborty 2021). Given the mounting pressures of inflation, if central banks “bite the bullet and become hawkish” by hiking rates, the growth recovery process may slow down. Given these constraints on the monetary policy stance, can we rely on “fiscal dominance” to counter the adverse affects of exogenous supply shocks on recovery and growth?
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