MARKETNOMIX INSIGHTS

GLOBAL ECONOMIC WOES MASK INDIA’S POLICY CONFUSION

Storm clouds may be on the horizon for India’s economy while India’s policy makers continue to emphasize the relatively high real GDP growth of 7.6% in FY2016 along with macroeconomic stability. Recent monetary policy and fiscal policy announcements have not been encouraging, but in fact confusing. RBI, as we shall see below, now has two monetary policy frameworks – inflation targeting and “monetary targeting’’ – that it wants to follow – and these could be contradictory creating confusion about monetary policy intent. The RBI’s policy quandary has to an extent been driven by the poor quality of the fiscal adjustment that the government has undertaken. The Indian government’s fiscal consolidation efforts thus far have been an accounting mirage. The political and the monetary authorities will need to work together to frame appropriate and coordinated policies to ward off the emerging risks to the economy. These policies would primarily need to include structural reforms to make prices more market oriented while the RBI may need to adopt a more eclectic monetary policy with greater transparency about its intent.

MARKETNOMIX INSIGHTS

RESERVE BANK OF INDIA’S (RBI) POLICY COMPOUNDS INDIA’S VULNERABILITIES

HEADWINDS FOR INDIA – BREXIT AND ITS IMPACT VIA OTHER COUNTRIES

As the global financial markets grapple with the decision taken by the UK to exit the EU, it is clear that the question of future referendums in other member countries and potential exits will likely dominate the headlines in the coming months. The Indian economy has seen its total exports decline for 18 straight months, hurt by an overvalued exchange rate as well as a weak global economy. The uncertainty that will likely unfold in the major EU countries and especially the Eurozone (EZ) will add to the headwinds for a recovery in India’s exports. The challenges India now faces will be two fold – the direct impact of any slowdown in EZ and the policy response that may be unleashed in China , Japan and other countries to counter their own economic slowdown, both domestic as well as external. The EU is China’s largest export destination after all and China’s currency, the renminbi (RMB) already faces depreciation pressures from capital outflows. A move by the Chinese authorities to allow their currency to depreciate further will continue to hurt India’s domestic industry unless reciprocated via a weaker rupee.

MARKETNOMIX INSIGHTS

RESERVE BANK OF INDIA’S (RBI) POLICY COMPOUNDS INDIA’S VULNERABILITIES

RESERVE BANK OF INDIA’S (RBI) POLICY COMPOUNDS INDIA’S VULNERABILITIES

India is not ready for inflation targeting. The RBI’s monetary and exchange policies, under the newly adopted IT framework, have turned adverse hurting economic growth, increased the vulnerability of the Indian rupee and the financial system. Inflation has come down not because of higher rate policy but more because of a decline in food prices and international oil prices. The high interest rate and overvalued exchange rate regime have led to lower investments, lower non-oil exports, higher non-oil non-gold imports hurting domestic industry. The longer the current monetary policy is maintained, the greater is the permanence of the damage to potential output and jobs concomitant with loss of skills for the unemployed. Gold imports have increased in recent months possibly indicating it as a hedge against expected currency depreciation.

MARKETNOMIX INSIGHTS

RESERVE BANK OF INDIA’S (RBI) POLICY COMPOUNDS INDIA’S VULNERABILITIES