World Bank Report:
- World Bank (WB) said in its report “Global economic prospects” in January 2022 that the global economy, after rebounding 5.5% in 2021 (its strongest post-recession pace in 80 years) is expected to decelerate to 4.1% in 2022 on account of continued Covid-19 flare-ups, diminished fiscal support and continued supply chain bottlenecks.
- It said that growth may soften further to 3.2% in 2023 as pent up demand wanes and supportive macro-economic policies unwound.
- WB expects the inflation to rise due to pandemic resurgence, higher food and energy price and supply disruptions. This could lead to tighter fiscal and monetary policies especially in emerging market and developing economies (EMDEs). (See Chart)
- WB is also concerned by rising income inequality as pandemic has hit the lower income population highest.
- On positive side, WB expects the Indian economy GDP growth at 8.3% in 2022 and 8.7% in 2023. (Advanced estimates of Indian government are 9.2% for FY22.)
U.S. Inflation 4 decade high:
- S. Consumer inflation was 6.8% in November 2021 compared to a year earlier which is the highest inflation rate in 4 decades, last peak being in 1982. Price increase was seen across many sectors including gas, food and housing.
- High inflation has brought criticism on Biden government. However, Joe Biden has maintained that inflation rate is only transitory.
- On the other hand, Feds have started taking first steps to curb inflation.
- Feds have begun tapering in November 2021. However, they have avoided increasing ultra-low interest rates yet.
Quantitative Easing and Tapering:
- Quantitative easing (QE) is a monetary policy in which a central bank buys out the government bonds and other long term securities from the market to increase the money supply.
- Buying securities increases liquidity and lowers interest rates and promote lending and investment. QE is employed when federal funds rates are already very low and can’t be decreased further.
- QE increases central bank balance sheet size. With QE the central banks run the risk of inflation and currency devaluation.
- Tapering is the reverse of QE. When the Fed systematically decreases the amount of assets it is purchasing each month it is known as Tapering.
- QE was employed heavily after 2009 crisis and continued till 2014.
- In response to Covid -19 pandemic a Feds announced approx. $700 Billion of QE in March 2020. As of mid-summer 2020 additional $2 Trillion in assets have been added to the books of Federal Reserve.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
Disclaimer:
This material has been prepared by the personnel in Vora Corporate Finance which is Investment Banking arm of Vora Management Consultancy Private Limited and looks after Mergers & Acquisitions (M&A), Private Equity (PE), Fund Raising, Debt syndication and Valuations and is based out of Ahmedabad, Gujarat, India. Any views or opinions expressed herein are solely that of individual authors and may differ from view of Vora Management Consultancy Private Limited. This material is proprietary to Vora Management Consultancy Private Limited and is for your personal use only. Any distribution, copy, reprints or forward to others is strictly prohibited.
This material captures the information based on information available in the public domain, public announcements and sources believed to be reliable. Analysis contained herein is based on publicly available information and appropriate assumptions. This material is intended merely to highlight market developments and is not intended to be comprehensive and does not constitute strategic, investment, legal or tax advice. In no event Vora Management Consultancy Private Limited be liable for any use by any party or for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you for evaluating any transaction.
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