The Fed has raised its benchmark interest rate again by a whopping 0.75%. The Reserve Bank of India has also been forced to raise interest rates further but also take other steps. These decisions in the Monetary Policy Committee (MPC) meeting are based on what the members of the MPC see as the likely course of the economy in the months ahead. But, the trajectory of the world economy, and its likely impact on the Indian economy, is imponderable. So, Indian policymakers would face two crucial problems.
First, the main uncertainty is due to Russia’s war on Ukraine and the resultant economic sanctions on Russia, as well as the zero-COVID-19 policy in China that repeatedly implements lockdowns leading to global supply bottlenecks. Second, policy has to base itself on data. If it is deficient, it introduces additional uncertainty, making projections for the future difficult and causing policies to fail. This will compound the problem that results from the global uncertainty.
