Can we ignore the world?

"Economists at the Indian central bank expect consumer price inflation to come down to 5% by the middle of 2023, which means that the real policy interest rate is already 90 basis points above the inflation forecast," Niranjan Rajadhayksha. "Hence, "The monetary policy committee should slow its pace of tightening." The US has an inflation target of 2% while its inflation rate is at 8.1%, giving a difference of 6.1%, while India's inflation target is 4% and here current inflation is at 6.9%, giving a difference of just 2.9%. So, the US needs to tighten but India can go easy. Can it? "When the Fed (US Federal Reserve) began raising rates in March, markets were pricing in a terminal rate of just 2.8%. As of mid-November, that expectation has risen to 5% - matching the forecast Bloomberg Economics set out in July." ET. However, "If the Fed is underestimating the natural rate of unemployment, or if the pandemic has resulted in a deterioration in productivity, a terminal rate of 6% could come into view."  The US Fed has raised its funds rate from 0% to 3.75-4%. "During January-September 2022, the US dollar appreciated by almost 18% vis-a-vis six major currencies to reach its highest parity in decades." Mint. The result has been "far more devastating for the world outside the US, not only for emerging or developing economies, but also for industrialized economies." One dollar buys Rs 81.56 this morning. xe.com. If the US interest rate goes up to 6% the rupee will surely fall further which will increase the cost of imports, and consumer inflation. India's foreign exchange reserves have fallen from $645 billion in October 2021 to $529.994 billion in the week ended 4 November 2022, a decline of $115 billion, as the RBI sold dollars to support the rupee. ET. "We didn't pick up reserves just to keep it as a showpiece in the Reserve Bank of India," said Governor Shaktikanta Das. Higher prices due to inflation, a relatively stronger rupee because of RBI actions and falling global demand meant that exports fell sharply by 16.65% to $29.78 billion in October while trade deficit increased to $26.91 billion. The Wire. The RBI held interest rate at 4% for 24 months, from May 2020 to April 2022, NDTV, even though consumer price (CPI) inflation was at 6.27% in May 2020, fell to around 4% from December 2020 to April 2021, and has been above the RBI target of 4% since. HT. Which meant that savings in bank fixed deposits were losing money because of negative real interest rates. "In 2019-20, the weighted average interest rate on fixed deposits was 6.38%. In 2021-22, it had fallen to 5.03%," wrote Vivek Kaul. People switched to riskier assets to increase returns. "In 2020-21, of the total proportion of the incremental financial savings, only 2% went to mutual funds. Another 1.2% went into buying stocks directly. In 2021-22, these shot up to 6.3% and 1.9% respectively." What will the RBI do? Increase rates or hope for the best?