Global Rat(e) Race: Risks for India’s Budget 2023

Shankkar Aiyar
5 min readDec 19, 2022

The global economy seems set for a Wile E Coyote Moment as central banks are flying blind. India is better placed than others. But the vulnerabilities are undeniable and buying into theories of ‘decoupling’ worsens risks.

By Shankkar Aiyar | Published: 18th December 2022 12:23 AM |

The limits of ‘knowing’ have been a subject of riveting interpretations in recent history. In 2002, former US Defence Secretary Donald Rumsfeld introduced the idiom of known unknowns and unknown unknowns into popular discourse. This week US Federal Reserve Chairman Jerome Powell invoked Fitch’s paradox and inducted ‘not knowable’ into popular lexicon as he said it is not knowable whether there will be a recession or not.

The global economy is stranded between the Rumsfeld argot and Powell phraseology. And the realm of unknown unknowns and not knowable is expanding. This week central banks of ten economies– India, United States, United Kingdom, European Union, Switzerland, Norway, Mexico, Taiwan, Philippines and Colombia — participated in a rat(e) hike race. The hypothesis of stickier inflation has triggered rate hikes across geographies.

In fact, the current rate hikes are the steepest and fastest in recent history. Powell channeled his inner Volcker and hiked rates by 425 basis points in nine months while promising more. In Europe, infamous for negative interest rates, the European Central Bank hiked rates four times in five months to 2 per cent. The Bank of England hiked rates eight times this year taking its bank rate to 3.5 per cent.

How have the rate hikes played out? In June 2022, this column had cautioned ‘Brace for Impact, Central Banks Flying Blind. Fact is despite rate hikes inflation continues to be three times the targeted levels. This one factoid from the US Fed records illustrates the struggle. In March 2022 the Summary of economic projections estimated that inflation would fall to 4.3 per cent. Fact is unemployment is at a 50 year low, inflation in November is 7.1 per cent and the December projections reveal inflation will be higher and GDP growth lower in the US in 2023.

Image used for representational purpose only. Photo | EPS | The New Indian Express

The story is not dissimilar elsewhere but central bankers are not about to pause or pivot. The mantra “higher for longer” is the received wisdom and consensus across advanced economies. Fed Chief Powell anticipates “ongoing increases will be appropriate” to return to the 2 per cent target. ECB chief Christine Lagarde shot off a warning: “We’re not pivoting, we’re not wavering”. The lather in financial markets about a pause/pivot dissipated triggering a steep slide in equity valuations while bond yields dipped in the US and rose in Europe.

The optimists are betting on the elections calendar and expectations of intervention. Ten of the G20 economies — including large economies such as the United States, United Kingdom and India — are heading into the general election cycle in the next 12 months.

The logic is higher rates will lead to job losses and loss of wealth effect. This will trigger political pressure for a pause, even a pivot to rate cuts to mitigate misery. The realists believe the outcome of the bets is located in known unknowns and ‘not knowable’.

The circumstance warrants caution in the formulation of Budget 2023. It arrives in the wake of uncertain geopolitics, slowing growth and persistent inflation — and the China opening story could complicate matters. For sure India, as the fastest growing large economy, is better placed than other economies. Revenue collections are robust and reflect buoyancy. Its borrowings are funded largely by captive domestic savings. That said, buying into theories of exceptionalism and ‘decoupling’ carry explicit risks.

The vulnerabilities are undeniable. Exports which account for nearly a fifth of gross domestic output have contracted and imports continue to rise widening the current account deficit. Slower global growth will lower demand for goods and services — and this will hurt the MSMEs most. The rupee is hovering around Rs 82.80 per dollar. It is true that the rupee is doing better than other emerging economy currencies but parading the point does not discount the higher cost India will pay for rising imports.

The crux is the cost of global capital. Rates in the US are expected to nudge past 5.1 per cent and those in Europe are estimated to cross 3-plus per cent. The rising attraction of returns on bonds in advanced economies — risk free returns in the US are currently estimated at 6 plus per cent — will daunt the rollover of external borrowings, curtail inflows and could also trigger outflows from public markets.

Budget 2023 will be the last full budget before the Lok Sabha elections in 2024. Uncertainty and disruptions in food and energy markets have already imposed a cost on allocations of over Rs 3 lakh crore this year. The expansion of freebie culture in states ruled by regional parties could fuel demand for expansion of sops.

The RBI has kept the options of raising interest rates higher than the current 6.25 per cent. The question is whether and also how India can, with a debt to GDP ratio of 84-plus per cent, fund such expectations when growth is expected to taper.

The global economy it would seem is approaching its ‘Wile E Coyote moment’. The soccer stars at Doha have underlined the importance of not conceding goals and yet finding ways of converting opportunities. The key phrase for Budget 2023 should be ‘prudence’. It is imperative to be imaginative about the possible downsides confronting the economy.

Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’. You can email him at and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.



Shankkar Aiyar

Journalist-Analyst. Author of ‘Accidental India, ‘Áadhaar: A Biometric History’ and ‘The Gated Republic’. Studying how politics rules the economics of people!