The U.S. Federal Reserve’s recent commentary has instilled substantial volatility in global financial markets, with significant spillovers and ripple effects across emerging market economies (EMEs), Reserve Bank of India (RBI), Shaktikanta Das.
“This episode is further demonstration of the point raised in my interview with the media on August 23, 2022 that while forward guidance can be a useful policy tool in a phase of accommodative monetary policy, it can be quite difficult to provide guidance consistent and consistent in a tightening cycle,” Das said at an event hosted by the Fixed Income Money Market and Derivatives Association of India (Fimmda). Last week, Fed Chairman Jerome Powell delivered a a speech that clearly underscored the US central bank’s priority of inflation concerns over growth.Markets around the world slumped over his comments.
Das added that the difficulty of offering advice is further compounded in the current environment of high uncertainty. “These forward-looking directions may even have destabilizing effects on financial markets, particularly if subsequent policy actions are at odds with earlier statements,” he observed.
In a turbulent global environment, the resilience of Indian financial markets reflects the strong macroeconomic fundamentals of the economy, Das said. Among India’s key strengths, he listed its status as one of the world’s fastest growing major economies and its favorable growth differential, reflected in increased portfolio flows to India since July. 2022.
The recent decline in commodity prices and supply chain pressures have mitigated the terms of trade shock that India has faced in the aftermath of the pandemic and war, Das said. He reiterated that with the consequent easing of imported inflationary pressures, India’s Consumer Price Index (CPI) inflation peaked in April 2022. Further, he reassured himself on the fact that the Indian basket average price of crude in August at $97.4 per barrel turned out to be lower than the RBI’s assumption of $105 for the full year.
“The change in the outlook for commodity prices also changes the assessment of India’s current account deficit in 2022-23, which is now expected to remain well below sustainable levels,” Das said. He cited India’s large buffer stocks of food grains, foreign exchange reserves of $561 billion and the health of the banking system as other sources of comfort.
The Governor took a step ahead of the RBI’s usual line that it only intervenes in the foreign exchange markets to curb volatility, saying the central bank was making sure there was no “overshoot” of the rupee level.