Perfect Storm

Merriam-Webster defines a Perfect Storm as a critical or disastrous situation created by a powerful concurrence of factors. What is happening currently in the world economy is an example.

Let me put it in the Indian context. We have recently seen the INR depreciating, the stock market tanking for a while and overall economic numbers remain slightly gloomy. Don’t be fooled by anyone who tells otherwise. I saw many WhatsApp forwards and statuses showing the probability of a recession in India being Zero. To put that in context, that was a survey of economists. Not backed by any other number.

So, what are the ingredients of this perfect storm?

  1. Supply shock – India is an import-dependent country. Any increase in crude prices pushes our economy into an ever-widening deficit. The Russia-Ukraine war for one has increased the cost of our crude ever so slightly.
  2. Inflation numbers – Our inflation numbers have been moving towards the higher end of the RBI band for around 4 months now. In order to avoid overheating the economy, with too much capital chasing too few goods, RBI, proactively increased interest rates and is expected to do so again.
  3. Lack of credit offtake – While our bank credit numbers seem to be growing, the numbers are still skewed towards large and mid corporates finally getting off the ground. To see an actual transmission of credit, RBI needs to do a lot of work in the supply chain finance space.
  4. Overall US economy seems to be grinding to a slow halt. It’s technically in a recession with 2 straight quarters of degrowth. This means most of the free money floating in the world is seeking a safe haven, which has typically been the USD.

While RBI has been able to support INR levels at around 79 for now, INR has still depreciated by around 8% in just 1 month. Our forex reserves have been rightly used to stem the runaway depreciation but RBI needs to come up the curve to slide this depreciation further.

I am not being pessimistic but I am not too sure of the direction the Indian economy is taking. We confuse stock market growth with real growth. We confuse chances/probability with possibility. We need to be a little more careful.

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