By K Raveendran
With the US Federal Reserve set to continue raising interest rates to combat record inflation rates, the highest in 40 years, there are calls that the Reserve Bank of India deviate from its traditional policy of mirroring the US interest rate hikes.
The RBI has effected six consecutive rate hikes despite an easing of domestic inflation, particularly food inflation, which had set the regulator on course to continuously raise rates. At its meeting in February, the RBI monetary policy committee had raised rates by 25 basis points to take the interest rate to 6.5 percent.
The hikes more or less reflected the action by US Fed, which effected five consecutive rate hikes, the last one by half percentage point in December last year, compared to the previous 0.75 percent in the four previous hikes. The US benchmark lending rate is the highest since January 2008.
The call to decouple Indian interest rates from those set by the US Fed comes ahead of the next meeting of the RBI panel this month, which is the first of six meetings planned for the new financial year beginning this month.
SBI group chief economic adviser Soumya Kanti Ghosh had recently called for a deviation in the RBI policy, saying there was no end in sight for the US cycle of Fed hikes, but the Indian situation did not warrant such a policy here. Ghosh further pointed out that although central banks followed the Fed’s interest rate hikes from 2008, they began cutting the rates depending on country-specific factors.
The RBI has raised interest rates by 250 basis points since May 2020, and this cycle is still underway. Most economists believe that the RBI will continue to hike rates in keeping with the trend set by the US Federal Reserve, although the US central bank has been raising the rates more aggressive than the RBI.
The Fed has to keep in mind the crisis in the mid-size banks in the wake of the collapse of Silicon Valley and Signature banks, followed by the globalisation of the problem, mirrored by trouble in the Swiss banking industry set off by the woes of Credit Suisse. But the Indian banking sector has shown that it is insulated from such global crisis, which demonstrates the resilience of Indian banking. Although the RBI has been keeping a close watch on the evolving stress in the global banking system and the possible impact on liquidity, counter-party exposures etc.
RBI has been constantly engaging with banks, nudging them to adopt robust risk management practices, conduct periodic stress tests and build sufficient capital buffers. Foreign banks have a relatively smaller presence in India with a 6 per cent share in total assets, 4 per cent in loans and 5 per cent in deposits. They are more active in the derivative markets (where they have a 50 per cent share. Most of them are present as branches of the parent bank with only a few present as wholly-owned subsidiaries.
Indian banks and financial institutions are not as integrated into the global financial system as the banks in other major economies may be. It has been pointed out that even the fall of a bank like the Credit Suisse will have only limited implications on the Indian economy. Further, the Indian ecosystem has its own depth with the influx of large angel investors and the expansion of alternative investment options.
In fact, at this point of time India’s macroeconomic factors are turning better and it can stand out in this global financial turmoil. The current account deficit looks below 2.5 per cent in the current financial year and going below 2 per cent in the next. The situation has been further helped by fall in oil prices, taking a big pressure off fiscal system.
As Morgan Stanley pointed out in a recent report, India is on track to become the world’s third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030, thanks to global trends and key investments the country has made in technology and energy.
The country is already the fastest-growing economy in the world, having clocked 5.5 percent average gross domestic product growth over the past decade. Morgan Stanley further noted that three megatrends, such as global offshoring, digitalization and energy transition are setting the scene for unprecedented economic growth.
This is all the more reason why the Reserve Bank should follow a truly independent monetary policy, which is more based on the specific domestic factors rather than look westwards for policy guidelines. (IPA Service)
The post It May Be Time For RBI To Decouple From Policies Set By U.S. Federal Reserve first appeared on IPA Newspack.
