How has the US dominance after the Cold War shaped the global economy and politics? Do we see that changing due to pressures of sharp inequality, polarisation, populist authoritarianism and climate change?  

The end of the Cold War felt like the victory of the West's liberal democracy and capitalism, over authoritarianism and command economies. However, over the past three decades, that conclusion has been challenged on multiple counts. First is the breathtaking emergence of China - firmly under the grip of the Communist Party - as a major economic and military power, rivaling the West. Second, rapid changes and sharply higher economic inequality has given rise to populist angst in Western democracies against globalisation, immigration, big business, elites, and liberalism. Third and latest, Russia under Putin is now violently reminding the world that it retains the largest nuclear arsenal in the world.  In all, many challenges to the liberal democratic way are very much alive - from both within and from outside. These are amplified in today's noisy and angry world of social media. The global geopolitical context is being reset, as we speak. 

While recent actions by SWIFT and especially the effective freezing of a significant chunk of Russian reserves would worry central banks around the world, it is very difficult to see any immediate alternatives to the USD or EUR

Will the Ukraine war lead to a multipolar world order and where do you see India’s position in this? 

On the face of it, it does feel like Cold War II is emerging, as Shankkar Aiyar puts it. On one side, we have the liberal democracies of NATO, Japan, South Korea, and Australia. On the other side, we have authoritarian regimes such as Russia and China. But I am wary of jumping into simplistic conclusions. History tells us that liberal democracies, will at best have noisy coalitions, and can struggle to arrive at meaningful consensus. On the other side, Russia and China have a troubled history along their contentious, long border. Given its vast exports, China also has a much larger stake - as compared to Russia - in keeping the global economy humming. Geopolitics is complicated. 

India's principal geopolitical interest is the successful management of its deep border disputes with China and Pakistan. In the past, the erstwhile USSR provided us immense strategic, military, and diplomatic support in this regard - in fact, much of our military hardware is still Russian. Now, however, our core interests - particularly around China - are more aligned with the West. Ideally, we should use our goodwill and help the West and Russia bridge their differences over time. Separately, we should leverage the West's pivot away from China, to draw in investments, jobs, and economic growth for our country. Ultimately, the best way to serve our geopolitical interests would be to strengthen our own economy substantially. 

How will the Russia-Ukraine war impact India’s trade? 

First, the war has pushed up commodity prices, across energy, metals, fertilisers, and food. While that augurs well for India's wheat and cereal exports, on balance, this can push up our import bill substantially.  Second, the war will impact global growth, and hence impact the demand for our exports. Overall, if the current context endures, our goods trade deficit could top USD 250 billion over the next 12 months, and our current account deficit could exceed USD 100 billion - both would be all-time highs in absolute terms.

How can India trade with Russia in the current environment? Will it be advantageous as we can source cheaper oil from Russia for our needs?

We import 85% of our energy needs. Sustained high energy prices in an uncertain global context is the Indian policymaker's nightmare. This can worsen our already uneven and unsatisfactory recovery from Covid, push inflation higher, and worsen our external and fiscal balance, and keep unemployment high. 

At a time like this, India cannot be faulted for looking for ways to substantially lighten the cost of energy imports. After all, much of Europe continues to source its gas from Russia, and trade with Russia has not been outlawed. While there will likely be protests from some Western commentators, I think Western governments recognize that India is a crucial power in this current geopolitical context.  On a related note, the US still has to take a decision on whether to sanction India for importing S-400 air defense systems from Russia, under CAATSA (Countering America’s Adversaries through Sanctions Act). Bluntly, it would be silly for the US to take action against India now - they would be pushing a crucial power, with many shared interests, to the other side.

Is it safe to conduct rupee-rouble trade?

We have conducted rupee-rouble trades in the past with the USSR and then with Russia. The upside, of course, is that it is easier to get around SWIFT and other restrictions that may come about. One downside is the uncertainty around the conversion rate to be chosen. RUB is extremely volatile in global markets now, with the Bank of Russia unable to access a substantial part of its currency reserves.

The second downside is that we have roughly USD 5 billion trade deficit with Russia now. INR-RUB trades would leave Russians with large INR balances. Allowing such INR balances to be converted into other currencies could have geopolitical implications. That can’t be ignored.

About $500 million of Indian exporters’ receivables are stuck in Russia. How can this be brought back?

This is a challenge, particularly since it is very difficult for Russian importers to buy foreign currency. If this issue persists, one hopes that the formalisation of some form of the rupee-rouble trade will help us work around this issue.

Why do you think India is taking too long to make a rupee-rouble trade agreement?

To be fair to the authorities, there are several issues to be considered here - ranging from the geopolitical to the operational. Ultimately, the decision will likely have to be taken at the highest levels of our government. 

Do you agree with India’s stance of abstaining twice from voting against Russia’s military aggression in the UN?

Bottomline, even if it seems very unlikely for now, we would like to see the West and Russia bridge their divides. In turn, that would allow the US to continue its pivot towards Indo-Pacific - where our interests converge over China. I think our abstention keeps the door open for us to play the role as a mediator between the West and Russia, and strengthen our own economic and geopolitical interests in the Indo-Pacific region.

The Federal Reserve has raised interest rates by a quarter of a percentage point. Will this soften the inflation in the US in the short term or you would have wanted a hike by 0.50%? 

The Fed has effectively signaled seven rate hikes in 2022, besides the start of quantitative tightening. Clearly, both at a political level and at the Federal Reserve, controlling inflation is the priority. I think inflation expectations will ease over time - but elevated commodity prices from the Ukraine context complicate the picture substantially. The other worry remains that the Fed pendulum may swing too much to the other side, particularly at a time when global growth is looking suspect. Some form of stagflation cannot be ruled out - and there is no monetary policy playbook that can counter this.

How do you see inflation behaving in the world?

Unfortunately, the uncertain geopolitical context makes any macroeconomic prediction even tougher than usual. One only hopes that a sustainable peace emerges soon between Russia and Ukraine. Had it not been for the conflict, between strong monetary responses and an eventual repair of the supply chains, I would have expected inflation to ease through the course of the year. 

The Reserve Bank of India has been putting growth ahead of inflation. What do you think the RBI’s strategy should be?

The February MPC (monetary policy committee) estimate for FY23 CPI inflation at 4.5% average seemed optimistic even then. It looks behind the curve now. If oil and commodity prices persist at current levels, even with another cut in excise duties similar to November 2021, the risk of average FY23 inflation exceeding 6%is not trivial. Having said that, it is very unclear if any hike in short term rates or draining of excess INR liquidity can control this kind of inflation - after all, credit growth is still very tepid, at barely 7% per annum over the last two years.

To address the problem of negative real rates, however, in my view, the repression of longer end rates should be reduced. Higher longer end rates brought about by heavy government borrowing can give reasonable return to our long term savers, and reduce the chances of asset price and consumer inflation. At the moment, in the midst of a very uneven recovery, the beneficiaries of the formal sectors of the economy have increased their financial savings. With negative real rates, they are forced to chase assets such as gold and equity. 

If oil and commodity prices persist at current levels, even with another cut in excise duties similar to November 2021, the risk of average FY23 inflation exceeding 6% is not trivia

Where do you think the prices of commodities will end?

But for geopolitics, with China slowing down for a variety of reasons, commodity prices should have started to subside by now. To that extent, in the short run, much depends on how Russia-Ukraine, and its geopolitical consequences, play out. 

In the medium run, I think the current shock will give fresh impetus for countries to move away from fossil fuel, and explore more investments into renewables, battery storage, and perhaps nuclear power. Notwithstanding the current spike, the prices of fossil fuels should perhaps come down in the medium to long run. That should be possible for India's own external balance and macroeconomic health.

Oil drove much of the widening of India’s trade deficit in February. How is the government going to manage its finances?

It is a tough context, both for the RBI and the government. The central government lost nearly INR 1 lakh crore annualised, when it reduced excise duties in November. Given the sharp rise in crude oil prices since then, even if it provides another similar cut in excise duties, FY23 inflation could end well over the MPC estimate. Add to that, prices of fertilisers, edible oil, and other commodities will also lead to higher subsidies or lower duties. 

What are the big worries for the Indian economy and what steps should we be taking?

 An uneven and unsatisfactory economic recovery, high inflation, a stretched external balance and fiscal balance, and inadequate job creation are all worries for us. RBI's record levels of FX reserves offers much buffer and degrees of policy freedom. However, for sustainable improvement in our economic context, we need durable solutions to the problems listed. The government's push on infrastructure, measures to improve ease of investments such as labour law reforms and tax cuts, incentives such as PLI to improve output and jobs, privatisation, and the push on digital infra should help address these issues in a meaningful way. However, executing on all these areas is not easy - and execution challenges remain.

Being a big exporter, Russia has a current surplus of $400 billion which gets invested in the overseas Euro dollar market. Now if that flow is scuttled, will there be a huge dollar shortage globally? Will this apply to India as well?

At a system level, there is ample USD liquidity available - one would in fact argue that there is too much USD liquidity. However, especially during a risk-off period, there can be distinct pockets that are short of liquidity, that are unable to raise funds from those that are surplus. Global markets witnessed this phenomenon as recently as in late 2018. Besides the possible outcomes from the ongoing SWIFT restrictions etc.,  the Fed's eventual QT may exacerbate the situation as well. However, I think central banks globally - including RBI - would be vigilant to ensure that any dislocations are short-term, and do not threaten overall financial stability. 

How comprehensive are the sanctions in crippling the Russian economy? How long can this stay and how will it impact globally, including India?

It appears that Russia is seeing a brain drain now, besides a very volatile and illiquid currency market. The Bank of Russia raised interest rates to 20% recently. Its equity markets have been closed since 25 February. Inflation and shortages look inevitable, as the Western sanctions and restrictions start to kick in. In addition, the war in Ukraine is draining resources as well. The economic costs are very high for Russia.

That said, Russians have a history of withstanding immense pain for a long time, especially when cornered. 

Rouble has already depreciated 40% and continues to fall. To what extent can the yuan support it?

While China has a geopolitical interest in maintaining Russia as a bulwark against the US and West, it is also deeply integrated with the global economy.  2022 is a crucial year politically for Xi Jinping, even as the shadow of the pandemic continues to linger over China. In all, China may be keen to avert any further economic turmoil. Any overt Chinese support for the Russian economy could risk an economic response from the West - and China could be wary of that.

Will the de-dollarisation drive be successful as we move to a multipolar world?

US, EU, Japan and UK themselves account for over 50% of global GDP. While recent actions by SWIFT and especially the effective freezing of a significant chunk of Russian reserves would worry central banks around the world, it is very difficult to see any immediate alternatives to the USD or EUR. 

BIS data suggests that CNY hardly figures in about 4% of global FX trades by value. In addition, countries like India would certainly be wary of relying too much on CNY as a reserve currency - it is difficult to put too much faith into an authoritarian regime. As Churchill once said, democracy is the worst form of government, except for all the others that have been tried. The same probably extends to USD/ EUR as well.

That said, central banks, including India, should be actively reviewing contingency plans in the wake of recent events. For HNIs, the arguments for cryptocurrency and gold have been strengthened. For India specifically, holding a chunk of our FX reserves in the form of crude oil may well make sense, both as an economic hedge (given our reliance on energy imports), and as a physical buffer against any sudden shortages.

How formidable can the rouble-yuan combination be along with cryptocurrencies?

While Russia is a large source of gas, energy and some select commodities, with a GDP of USD 1.5 trillion, its overall economy is relatively small, and is dwarfed by that of the US, EU and China. Economically, it is very difficult to see the rouble make a big impact to global finance - even if it were paired with CNY. In addition, China itself may be wary of excessive support for Russia, thus endangering its vast trade with the West. Those that advocate cryptocurrencies have always argued that individual fiat currencies are subject to the whims of governments - something that is underlined by recent events. To that extent, HNI interest in cryptocurrencies will probably be heightened now, even as governments consider curbing the growing power of cryptos. 

How do you see the Euro evolving?

Given that the US and EU seem tied at the NATO hip for now, it is difficult to see EUR as a meaningful alternative reserve currency to the US by itself. That said, a more assertive NATO - with countries like Germany looking to substantially increase defense spending - could rub off on EUR as well.