How do you see the Indian economy performing in the year 2022? Will it be about growth, inflation or interest rates?

The previous year saw a semblance of hope return to the economy and to markets due to an economic recovery. That was also evident in corporate results each quarter. But let us now look at what will be the major macroeconomic triggers for the coming year.

a) Like it or not, but inflation will trend higher in the year 2022. There are a number of reasons. Supply chain bottlenecks are likely to persist for much longer. Like the US, India is also likely to see consistently higher inflation in 2022.

b) Increasingly, central banks will try to control inflation through monetary measures and fail. The supply chain bottlenecks should get resolved by end of 2022 and then inflation should globally taper only in 2023.

c) What about bond yields? Interest rates will move up on central bank efforts and so bond yields will also move up. In India, banks and bond investors are clear about this point, which is why the RBI bond auctions are consistently devolving.

d) The combination of liquidity tightness and higher inflation will mean that rates will rise at the short end and long end of the yield curve. The year will make a strong case for investment in short term debt and floaters.

e) Equities, especially the financials will face pressure. Higher yields means higher cost of capital and that means future cash flows will get discounted at higher rates. Also, this will mean investment losses for banks and bankruptcy risk for leveraged companies.

f) What about GDP recovery? It will happen, but much slower than expected by the various economies. China will still drag the world economy as its demand will continue to taper in the midst of a major shift that China is seeing.

g) How serious would Omicron be in the year 2022? Hard to say at this point, but the impact may be more of a peripheral impact on health and on macros. At least, the combined experience of various countries of the last few years will help.

h) One good thing we will see is a revival in all around merchandise trade. India will get a much larger share of the China trade franchise. Port level and container constraints will be resolved but a big trade shift could start.

i) The global trade policy could change in 2022. WTO will have to change its logic on free trade and be more considerate towards the subsidizing needs of emerging markets to bring about really fair trade. That is going to be a big change.

j) Lastly, what about oil. In 2022, oil prices may still remain elevated as the OPEC constrict supply. But the first impact of the EV shift and renewable shift could be seen on oil prices in the year 2022. Surely, an interesting time to be in.