(I am not an economist and my knowledge about larger economy is limited. As a small investor, I tried to understand the happenings around and have summarised the same for discerning readers. I shall be happy to be corrected if my understanding of the events is flawed.) 

We are going through a very turbulent and unprecedented period. All Central Banks released unparalleled liquidity in the system to fight Corona related stress which they now want to unwind due to rising inflation. However, inflation is proving to be sticky which is putting pressure on policy makers as they find short of measures in fighting this phenomena. The invasion of Ukraine by Russia has added to the raging inflationary fires. The war has hit the world trade by creating uncertainties in transportation of commodities and oil. The western countries placed financial, currency and trade related restrictions on Russia to which Russia responded by cutting oil and gas supply to Europe. The European Economy is exceedingly dependent on Russian oil and gas and the Russian embargo on supply has created uncontrolled inflationary pressure in European countries and the UK. In the meantime, inflation surged to a four decade high level in the US and to control surging inflation, the US Federal Reserve has started incrasing the Policy Rate which has gone up from 0.80% in Feb 2022 to 3.25% in Sept 2022. Not only this, the US Federal Reserve has indicated further increase in Policy Rates in near future. This rate increase has made USD stronger against all the major currencies in the World, in turn eroding the value of Foreign Exchange Reserves of most other countries who hold the FE Reserves in currencies other than USD. Not only this, major economies started defending their currencies against the USD by selling USD from their FE Reserves. 

Due to stronger dollar, prices of major commodities and more particularly the Oil reacted negatively but the OPEC+ countries have decided to cut production of oil which stabilised the price of oil but has put additional inflationary pressure on countries who are dependent on imported oil such as India. 

In the UK, PM Boris Johnson resigned and Liz Truss took over as PM. She brought in ‘mini budget’ declaring sweeping tax cuts which were viewed to be favourable to the ultra rich class. How such tax cuts would be funded was a moot question. Ms. Truss’s government could not explain it. Obviously, it would have meant additional burden of more than 50 Billion Pounds on the exchequer. This measure led to sell off in govt securities in the UK and rout of Pound Sterling in currency markets and the pound going down sharply against the USD. 

At the same time, premiums on credit default swaps on the debt issued by one of the largest Banks in the world and strategically very important Swiss Bank, Credit Suisse have spiked to a 14 year high indicating a possible default. Stories are doing the rounds that the Bank may go down just like Lehman Brothers. If that happens, it will adversely impact the entire Banking Sector world over. This has made the financial sector jittery. 

Due to the rising USD, Foreign Portfolio Investors have been liquidating their positions across markets and are pulling down money from various markets. This has led to sell-off in equities everywhere and more particularly in emerging markets.

Normally when the equities are falling, the prices of debt securities go up. However, it is intriguing that presently prices of equities as also debt securities are falling together. 

The matters have been compounded by unpredictable weather conditions the world over. Europe has been hit by an unprecedented heat wave this year while many countries like India, Pakistan, China etc have seen unprecedented rains and consequent floods which has destroyed standing crops fueling the inflation further. 

There is the China factor also. China for decades has been the factory of the world. However, this year, due to a stringent anti-Corona Policy, a large part of China was under lockdown. Corona has still not been under total control in that country. Due to this policy of the government, factories were closed for production which has led to supply constraints for many industries the world over. 

Apart from this, since China and Russia are two major economies under Communist Regime and it’s difficult to get accurate information about what is happening there. China’s property market is reported to be in doldrums and many Banks are reported to be under severe stress due to stress in Evergrande Group, one of the largest real estate developer in China. 

In a country like India where we are net importers (our imports are 23% of GDP while our exports are 20% of GDP), all these factors weigh heavily on GDP growth. Due to spiralling prices of petroleum products and rising cost of imports due to sharp depreciation of INR against the USD, the impact on various industries is severe. On the other hand, the exports which consist of IT Services Exports to a large extent, are contracting due to severe slow down in Europe and possible recession in USA. This is likely to put the calculations of Budget Deficit also under stress. Our debt is about 90% of our GDP. When the RBI raises Policy Rates to contain the inflation, this has an undesired side effect in raising the cost of servicing the debt for the government. Obviously, it will be difficult to contain the Budget Deficit which is likely to have an impact on tax collection meaning taxes may go up in the next budget. It is also possible that the government may raise import duties on many products to contain imports and save precious foreign exchange.

All in all, it’s a gloomy scenario. It is interesting to note that on the other hand, the economy is growing and is considered one of the fastest growing economy of the world but on the other, the stock market is falling and the currency is falling due to global factors. It’s difficult to predict how this will unfold and only a very good news such as the Fed stopping the rate increase cycle or Russia decides to halt the ongoing war against Ukraine that the trends would reverse. 

To my mind, when pessimism is at it’s peak, new trends emerge. There may well be some rapprochement on the Russia-Ukraine War Front. There may well be some rethinking in the Chinese government on their strict Zero Covid Policy which would bring in some respite on the supply of cheap raw materials. The US Federal Reserve may go slow on rate hikes. (even otherwise, the base year for measuring inflation in the US is 1982-93 at 100. It has not been revised since then. Obviously, any change in consumer prices or wholesale prices, even if small, reflects big with reference to a smaller base, leading to hyper reaction from the policy-makers.) Let’s hope new developments would unfold soon to bring cheer and overtake the pessimism around.