Reviving consumption and investment critical challenge: RBI

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December 28, 2019 6:16 AM

Over the last year, uncertainties such as delay in the Brexit deal, trade tensions, ‘a whiff of impending recession’, oil market disruptions and geopolitical risks, have been on the rise.

The report said that while chasing yields, investors were betting on negative yielding bonds for capital gains, for which yields need to go down further.

The Reserve Bank of India (RBI) on Friday said that reviving the twin engines of consumption and investment, while being vigilant about spillovers from global financial markets, would remain a critical challenge going forward.
In its ‘Financial Stability Report’, the central bank said that spillovers can be seen through various dimensions — central bank’s action and stakeholders’ behaviour, global uncertainties and related spillovers, commodity market behaviour and capital flows.

The report said that while chasing yields, investors were betting on negative yielding bonds for capital gains, for which yields need to go down further. “(That is the) reason why what is good news for the real economies is also increasingly turning out to be bad news for the markets, and any indication of an end… in easy monetary policies rattles the markets.” it added. The RBI said that many leading central banks were grappling with the possibility of rising inflation due to constraints in multilateral trade.

Over the last year, uncertainties such as delay in the Brexit deal, trade tensions, ‘a whiff of impending recession’, oil market disruptions and geopolitical risks, have been on the rise. “The underlying global macro-financial conditions, coupled with geopolitical uncertainties continue to pose significant spillover risks to EMDEs (emerging markets and developing economies),” the RBI said. These weighed on consumer confidence and dampened investment intentions, becoming a key drag on global growth.

In the commodities markets, as supply constraints induced by geopolitical risks are unpredictable, the prices tend to deviate from equilibrium levels, it said. The report said that capital flows to emerging markets were gathering pace, which is a positive spillover, but without any significant boost to GDP. Owing to lower interest rates and easy monetary policies, the indebtedness of emerging market governments and households showing a distinct rise, besides supporting asset prices, it added.

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