India is likely to see only a “small” impact if the US Federal Reserve decides to hike interest rates as the country is doing well compared to other emerging market economies, according to noted Harvard University economist Gita Gopinath.
Observing that downside risks to the global economy remain quite high, except for the US, she said everybody agrees that countries cannot have “only monetary policy doing the job”.
“If they (the Federal Reserve) do anything, it will be small. It will be 25 basis points or something. They are not going to do a very big interest rate increase,” said Gopinath, who is the John Zwaanstra Professor of International Studies and of Economics at the Harvard University.
When asked whether the impact of such a move would be minimal on India, she said, “I would say it will be small. I would be surprised if it was a big impact” but as always there could be some tantrums in the market, especially with the exchange rates.
“Given that India is doing well otherwise in terms of its management of fiscal policy, monetary policy, pushing the reform agenda and that current account deficit is also low, that should separate India from other emerging markets in terms of their borrowing,” Gopinath told PTI in a recent interview.
Expectations over possible rate hike by the Fed have impacted the Indian markets as there were concerns that a such move would hit foreign fund flows into the country.
As part of larger efforts to bolster the American economy, it has been maintaining interest rate at near-zero levels for the past many years.
On September 21, the Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate at 0.25 to 0.50 per cent.
“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” FOMC said last month.
Gopinath, who hails from Kerala, is a member of economic advisory panel of the Federal Reserve Bank of New York and a visiting scholar at the Federal Reserve Bank of Boston. When asked whether there is still place for monetary policies that help pump in more money into the system, she said “there are clearly limits to it”.
“I think everybody agrees that you cannot have only monetary policy doing the job. The problem in Europe has the same issue, though interest rates are low, because the banking sector have all of these bad assets and they cannot stimulate the economy,” Gopinath said.
Infrastructure investments can be a second stimulatory source and the third is that countries continue to have reforms, she added.
Stating that she is quite concerned about the global economy, Gopinath said the downside risks remain quite high
except for the US.
“If you look at Europe, you have Italy which has serious problems with its banks, Portugal has serious problems. Lot of these countries are not recovering, if anything they may be behaving more (like) slowdown.”
“Then you have the UK, which next year will presumably start Brexit negotiations… There are also issues in Brazil,” she added.
On whether the Chinese economy could see a crash landing, Gopinath said one needs to worry about the massive credit growth happening in that country.
“That is really an important part of their growth rates being driven by this credit growth and they can’t sustain that. Usually in the past when there has been such big credit booms it has always ended badly.”
“I think everybody is waiting for the shoe to drop. It is a matter of concern, I don’t whether it is going to be soon or later, it is a matter of concern,” she noted.