Economists at the Union Ministry of Finance have done well to highlight the emerging twin-deficit risk. While the government’s revenue will be hit because of the reduction in duties on petroleum products, it is expected to incur higher expenditure, which could worsen the fiscal position. A higher fiscal deficit could widen the current account deficit (CAD) and put further pressure on the rupee. Currency management thus could become a bit tricky in the near term. India’s external account is under pressure, partly because of higher commodity prices. Capital flows that help finance the CAD are also witnessing a reversal due to the sudden tightening of global financial conditions. Higher inflation in the developed world is forcing central banks to withdraw monetary accommodation. The US Federal Reserve, for instance, raised the policy rate by 75 basis points last week — the largest increase since 1994. Since it is expected to continue to increase rates, global financial conditions would tighten significantly in the coming months.
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