Indian Economy Is Still In A Position To Insulate Itself From Global Turmoil

By Anjan Roy

Now that the Federal Reserve, European Central Bank and Bank of England have all raised their policy interest rates to fight inflation, there might be further flutters in the financial sector and several other banks might be nervous about the future.

However, the central bankers have flatly stated that their primary responsibility was to fight inflation and preserve price stability. Jerome Powell of the US Federal Reserve has stated that the economy could not function with high inflation rates. The Bank of England chief on the other hand felt more optimistic about the British economy after introducing the necessary rate hike.

What should be the prospect for the Indian economy. With rate hikes in most developed economies, it might be almost sure that there will be a period of turmoil in the financial markets. As the global financial players adjust to the higher and high rates of interest, they would redraw their plans for deployment of funds.

Generally, it can be fairly expected that some funds would be withdrawn from the emerging market economies and thus these markets should come under pressure. It is not as if we have not seen such concomitant instabilities in the financial markets when the developed economies make major adjustments.

During the time of Ben Bernanke’s so-called “taper tantrums” when after years of quantitative expansion to meet the after effect of the global financial meltdown, these measures were being reversed, emerging markets went through a period of severe storms. Many of these economies were facing serious balance of payments crisis, steep fall in their exchange rates and tanking stocks markets.

This time around, the emerging markets might face some adverse winds. Those accustomed to steady flows from overseas will certainly face problems and instability.

India must ring fence itself from these adverse global head winds. The most likely intrusion of these would be through the financial markets. Already, the stock markets have turned extremely volatile and in step the foreign exchange rate is under pressure. The rupee has lost ground against the US dollar. The RBI would have to tread a cautious pathway.

The Indian equity market has already been under pressure manly from some isolated events. The Hindenburg report on Adani Group has sparked off a downward cycle. The follow up demand of parliamentarians on the Adani Group has not helped sentiment. But, fortunately, the worst on this looks like being over and prices have been discounted.

The major banks’ share prices had been affected in sync with the general global melt down in bank shares. But it should be clear the Indian banks are insulated from these global trends and appear well-capitalised. There is no immediate cause for fear about their prospects.

But, as many of the overseas institutional investors are doing some of their calculations, outflow of funds could be real. And that would mean a further fall in Indian rupee exchange rate. This could have a direct link with the price line as imported items, most importantly oil, could see some further rise.

The silver lining is of course the price of oil itself. In the wake of the financial turmoil and bank failures, oil prices went down. International oil market experts are now almost certain that prices should see southward movement. Thus, despite exchange rate loss, domestic prices of oil need not be too volatile. But, general concern over inflation is still very strong.

While like elsewhere in the world, India is also witnessing rising price line, the Reserve Bank should apply its judgement in embarking on fresh rate hikes. Consumer price inflation normally shows a spike in the summer months based on the prices of food items.

The emphasis on inflation containment should be more on supply management in our country than demand management through interest rate manipulation. That should encourage overall growth momentum of the economy than put a brake on economic activity.

Indian monetary policy has most often struck its own direction even when the world’s leading central banks have pursued their own chosen track. All said, Indian economy is not as much integrated with the global one and can still remain insulated. This is what might be the lesson for now. (IPA Service)

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