Monetary policy will continue to be anchored by domestic macro-economic conditions rather than global factors. However, the liquidity tightening measures by the Fed and some other key central banks may force RBI to adopt a less dovish tone in its next policy meeting in April, while continuing with its accommodative stance to support growth, they said.
The US Federal Reserve’s decision to raise the interest rate for the first time in over three years will have only a limited spillover effect on India, as the markets have mostly priced in the impact, economists told FE.
Monetary policy will continue to be anchored by domestic macro-economic conditions rather than global factors. However, the liquidity tightening measures by the Fed and some other key central banks may force the Reserve Bank of India (RBI) to adopt a less dovish tone in its next policy meeting in April, while continuing with its accommodative stance to support growth, they said.
Moreover, given the strong macro-economic fundamentals, India is well-prepared to absorb any external shock. The RBI and the government, too, have the necessary tools to blunt much of the additional spillovers, they added. In fact, the stock markets on Thursday discounted the rate hike by the Fed. The Sensex gained as much as 1.8% to hit 57,864 points.
Saugata Bhattacharya, chief economist at Axis Bank, said, “Anticipating the global policy tightening, foreign portfolio investors (FPIs), the main channel for the spillovers, have already exited the Indian equity and debt markets over the past couple of months, with close to $19 billion outflows since October 2021.” The remaining holdings are likely to be of more long-term investors, who could be less inclined to sell their portfolio, he added.
ICRA chief economist Aditi Nayar said there are upside risks to domestic inflation and downside risks to growth relative to the monetary policy committee’s (MPC’s) last set of forecasts, complicating monetary policy decision making. She expected a “shallow rate hike cycle” with two repo hikes in FY23, modest relative to the seven rate hikes insinuated by the Fed dot plot.
“Regardless, G-sec yields will rise ahead of the increase in the repo rate, mirroring the trend in global interest rates,” she added.
Madan Sabnavis, chief economist, Bank of Baroda, said the latest Fed’s decision was a foregone conclusion; hence the immediate impact will be muted. “But yes, we cannot ignore the Fed rate hikes as this would mean the FPI flows will be affected, which typically impact currency, and hence will be monitored closely by the RBI.” Also, the rate hike means growth trends in the West are good, which means higher demand for commodities. This, in turn, means higher inflation, which could ultimately affects the government’s decisions on excise rates on fuels and subsidies.
Yes Bank chief economist Indranil Pan said the RBI, in the April meeting, will likely revise up its inflation forecasts but continue to “bide time and not raise policy rates to allow growth to take a firm hold”.
Pan said the bigger risk for India out of the Ukraine crisis is the downside to growth rather than an upside to inflation. “This is because the business cycle conditions in India are anyways weak at this moment, as it tends to crawl out of the hit from the pandemic. Structurally the economy was weak even pre-pandemic and some of the structural bottlenecks have probably worsened in the course of the pandemic – for example inequality issues and its impact on growth,” Pan said. The RBI will look forward to the fiscal policies to reduce the inflationary pains.
