As central banks adjust their policies and inflation rises, Asian economies face a more difficult road, according to Moody's

28 Jul 2022 , 07:54 AM

The world’s central banks have intensified their attempts to reduce the money supply in order to contain inflation, but increased credit costs might stifle economic activity and have an adverse impact on government debt, particularly in Asian economies where Moody’s expects inflation to remain high.

As supply was congested due to the pandemic’s emergence, inflation pressure increased across advanced-to-emerging nations, with several reporting record high consumer price spike readings. Geopolitical ambiguity and Russia’s invasion of Ukraine shortly after made matters worse by severely disrupting the supply of food and oil.

Global central banks responded by swiftly raising rates from decadal lows to restrain the availability of cheap money, even though this reduced demand at a time when it was feared that the world’s largest economy would enter recession and have a knock-on effect on other economies.

The Monetary Policy Committee of India also took action and raised rates from previously low levels. In fact, the effects of its decision to tighten monetary policy are already being felt as interbank call money levels soar up to 60 basis points above the policy repo rate. This could make it even more difficult for Mint Road to strike a balance between the twin goals of promoting growth and containing inflation while dealing with a sustained loss of liquidity.

After reaching a nearly eight-year high of 7.79% in April, retail inflation in India slightly decreased to 7.01% on an annual basis in June. It did, however, remain over the Reserve Bank of India’s mandated range of 2% to 6%, and it is anticipated to continue to be a source of concern that could eventually result in additional policy rate increases.

A new dawn of rapidly rising consumer prices has arrived in Asia, according to Moody’s, and the low-inflation scenario is about to experience a “rude awakening.”

Compared to other growing regions, emerging Asia has taken longer to experience inflation, but the rating agency predicted that as the year goes on, the consequences of inflation will worsen and have a negative impact on both this year’s and the following year’s growth.

Although debt levels in developing Asian nations are not as high as those in other difficult areas, they are not particularly low either. Additionally, in the midst of political unrest, authorities have either been unable or unwilling to control expenditure, endangering “hard-won records” of fiscal sustainability, according to Moody’s.