Comments
A mixed picture emerges when it comes to India’s vulnerability to the US Federal Reserve’s expected normalisation shock as the country is currently stronger externally and weaker domestically, according to CRISIL.
The credit rating agency believes the intensity of the normalisation shock this time (the last one was in 2013) could be less sharp than in the previous instances.
With economic recovery under its belt, the Fed is likely to begin the process of ‘normalisation’ of monetary policy, first by tapering its asset purchases (starting 2021-end), with a hike in policy rates expected only from 2023.
“Compared with 2013, India’s external position is much stronger on account of a lower current account deficit (CAD) and larger forex reserves to cover short-term liabilities.
“Domestic macros, however, remain weak, though recovering. Gross domestic product (GDP) is moving towards pre-pandemic levels, but its pace lags Emerging Market (EM) peers such as China and Turkey,” said Dharmakirti Joshi, Chief Economist, Dipti Deshpande, Principal Economist, and Pankhuri Tandon, Economist, in a report.
High inflation and public debt persist, ranking weaker than those of other EMs, the economists said in the report “Ramifications of the Fed taper”.
Current account deficit and forex reserves
The authors observe that India’s current account deficit (CAD) is expected to be lower in fiscal 2022 than in fiscal 2014. Coupled with stable external debt, total external liabilities are expected to remain in the safe zone in the current year.
They emphasised that the forex shield is tougher as the reserves adequately cover the country’s short-term debt liabilities and about 14 months of imports. However, India’s current import cover is lower than that of countries like China, Russia, Japan and Switzerland.
Even with the strong GDP growth of 9.5 per cent this fiscal, CRISIL expects, GDP would be a mere 1.5 per cent over the pre-pandemic (fiscal 2020) level.
“That’s a weaker rebound than that of China, Turkey and Indonesia, but stronger than South Africa, Brazil and Russia,”the economists said.
The economists observed that the extent of the third wave and pace of vaccinations would also affect the growth trajectory and investor sentiments.
The agency expects CPI (consumer price index) inflation at 5.8 per cent this fiscal. While lower than in fiscal 2014, it could still worry investors as it comes over a high base of last year. Also, the government’s debt position is worse off, CRISIL said.
India’s inflation is expected to be the third-highest among EM peers, lower than only Brazil’s and Turkey’s, it added.
CRISIL assessed that India ranks fourth in terms of catch-up of expected GDP this fiscal to pre-pandemic level, third in terms of inflation rate, and first in ratio of government debt to GDP, compared with six other key EM peers.
India’s government debt-to-GDP ratio at 90.5 per cent (2021 forecast) is the highest among peers, the agency said.
Comments
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.