Monetary policy will remain anchored by domestic macroeconomic conditions rather than global factors. However, liquidity-absorbing measures from the Fed and some other major central banks could force the RBI to adopt a less subdued tone at its next policy meeting in April as it continues its accommodative stance to support growth, they said.
The US Federal Reserve’s decision to raise rates for the first time in more than three years will have only limited spillover effect on India as markets have largely priced in the impact, economists told FE.
Monetary policy will remain anchored by domestic macroeconomic conditions rather than global factors. However, liquidity-absorbing measures from the Fed and some other major central banks could force the Reserve Bank of India (RBI) to adopt a less moderate tone at its next policy meeting in April, as it continues its accommodative stance in support of growth. said.
Moreover, given the strong macroeconomic fundamentals, India is well prepared to absorb any external shock. The RBI and the government also have the necessary tools to smooth out many of the additional spillovers, she added. In fact, the stock markets discounted the Fed rate hike on Thursday. The Sensex won a whopping 1.8% to get 57,864 points.
Saugata Bhattacharya, chief economist at Axis Bank, said: “In anticipation of global policy tightening, foreign portfolio investors (FPIs), the main channel for the spillovers, have already exited Indian stock and debt markets in recent months, with nearly $19 billion outflows since October 2021.” The remaining holdings are likely to belong to more long-term investors, who are less likely to sell their portfolios, he added.
Aditi Nayar, ICRA chief economist, said there are upside risks to domestic inflation and downside risks to growth compared to the latest set of forecasts from the monetary policy committee (MPC), complicating monetary policy decisions. She expected a “shallow rate hike cycle” with two repo hikes in FY23, modest compared to the seven rate hikes insinuated by the Fed-dot plot.
Either way, the G-sec rate will rise earlier than the repo rate rise, reflecting the trend in global interest rates,” she added.
Madan Sabnavis, chief economist, Bank of Baroda, said the Fed’s latest decision was a foregone conclusion; therefore, the immediate impact is damped. “But yes, we can’t ignore the Fed rate hikes because it would mean impacting FPI flows, which typically affect the currency, and are therefore closely monitored by the RBI.” The rate hike also means that growth trends in the West are good, meaning greater demand for commodities. This, in turn, means higher inflation, which could ultimately affect government decisions on fuel excise taxes and subsidies.
Yes, Indranil Pan, the bank’s chief economist, said the RBI will likely revise its inflation forecasts at its April meeting, but “will continue to wait and see and not raise key rates to sustain growth firmly”.
Pan said India’s greater risk from the Ukraine crisis is the downside of growth rather than inflation. “This is because the cyclical conditions in India at the moment are weak anyway, as it tends to emerge from the blow of the pandemic. Structurally, the economy was weak even before the pandemic and some of the structural bottlenecks are likely to have worsened over the course of the pandemic – for example, inequality issues and their impact on growth,” said Pan. The RBI will look to fiscal policy to ease inflationary pains.
This post Fed rate hike may have limited impact on India: economists
was original published at “https://www.financialexpress.com/economy/fed-rate-hike-may-have-limited-impact-on-india-economists/2464522/”