Blaming the IMF - is it fear?

In its April World Economic Outlook (WEO), the International Monetary Fund (IMF) projected India's GDP at Rs 389.01 trillion in 2026-27, which would amount to $4.534 trillion, but in October it said that India's GDP would be higher at Rs 392.84 trillion, but lower in dollar terms at $4.393 trillion, wrote an angry Prof V Anantha Nageswaran. "So, secondary school arithmetic will tell you" that in October, the IMF is predicting a weaker rupee against the dollar. "From 70.9 in 2020-21, the Fund sees the rupee depreciating to 89.4 against the US dollar by 2026-27." This is 4.2% worse than its April forecast of 85.8 to the dollar. Why the anger? Because, in the US, "Consumer-price (CPI) inflation rate has been stubbornly at or above 5% for the last 5 months." Higher prices should mean the dollar has a lower value. Why only 5 months? History of CPI inflation in the US shows an average of about 1.5%, going back 14 years to 2007, US Inflation Calculator, whereas average CPI inflation in India over the same period would be around 7%, inflation.eu. Since inflation compounds year to year the rupee has to depreciate against the dollar. "A slide of 3.3 percent versus the US dollar has raised fears of a quicker depreciation", because of "Rising Crude oil prices and a record current account deficit, the excess of imports over exports", ET. "The Real Effective Exchange Rate (REER) of the Rupee has appreciated 1.3 percent compared with a basket of 40 currencies till September, data from the RBI show. In the 6 currency REER basket it is up 1.5 percent." Rising prices lead to higher wage demands, which are passed on to the consumer in higher prices. According to the Federal Reserve Bank of Atlanta, US, "worker wages increased by 4.2% in September -- strong growth, but not enough to keep up with inflation", CNBC. "India Inc salaries are projected to see a median salary increase of 9.3% in 2022 -- translating to an average salary increase of 8.8% -- as compared to the actual median salary increase of 8% (average salary increase of 7.4%) in 2021," ET. Recently, the Indian government "hiked Dearness Allowance (DA) and Dearness Relief (DR) by 3% to 31%", while in July it had increased both DA and DR from 17% to 28%, The Wire. 'Dearness' means 'higher prices'. "As time has passed, it has become clearer to most central banks in the advanced world that inflation is proving more widespread and persistent than they had initially forecasted," Mohamed A El-Erian. While central banks of Australia, New Zealand and Norway have already started tightening, the Federal Reserve Chair Jerome Powell hasn't given "any hint that persistently high inflation in recent months was leading him to rethink his patient approach to raising the Fed's interest rate target", ET. "The more badly this much needed transition lags, the greater the risks to the global economy," thinks El-Erian. The RBI is way beyond the US Fed. Not only has it deliberately kept interest rate way below the rate of inflation since 22 May 2020, HT, "The RBI has expanded the list of tools in its armoury to influence interest rates, the exchange rate, liquidity in general and liquidity targeted at specific segments of end-borrowers to be mediated by different financial intermediaries and to prevent the differential between short- and medium-term rates from widening too much," ET. Everything except inflation. The rupee is strong because foreign investment in our financial instruments has risen to to total of Rs 54.7 trillion, TOI. So, if the Fed starts tightening faster a chunk of this money may flow out. the rupee will plummet and prices will jump. All because of the RBI. That is what is making Prof Nageswaran angry. But, he is afraid to say it.