Indirect Impact Of High Inflation Could Increase Pressure On Labour Market In India

Oil producing countries cartel OPEC has noted in a latest update that India's economy expanded for the sixth straight quarter in 1Q22, but growth eased to 4.1% y-o-y following 5.4% y-o-y in 4Q21, amid rising Omicron infections during 1Q22, elevated energy prices and ongoing supply chain constraints. OPEC says that in the near term, pent-up private consumption and increased policy support might push for further growth. However, elevated inflation, especially food inflation, might temper the recovery and curtail discretionary consumption impulses. Moreover, the indirect impact of high inflation could increase pressure on the labour market, considering the decrease in real wages.

External demand may slow amid a slower global growth recovery, which will affect demand for exports. In the meantime, the RBI's recent move to hike the policy rate to 4.9% to cope with spiralling inflation may have a lagging and limited impact on curbing it. It is likely that the current tightening policy will quickly cause higher lending rates, slowing consumer credit growth and moderating consumption impulses starting in late 2022.

It might also affect the profit margins of small- and medium-sized investments. Additionally, monetary tightening might increase long-term government bond yields, resulting in a higher market borrowing cost for the government, as well as less fiscal headroom for productive capital expenditure. The policy rate increase may provide some intermittent strength to the rupee exchange rate against the US dollar, though adverse sentiment towards emerging market countries might keep the rupee under pressure, leading to depreciation against the dollar.

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