India’s economy is in much better shape to weather tighter U.S. monetary policy than it was two years ago, according to the economics team from ICICI Securities PD, the most accurate forecasters on Indian economic data in Reuters polls last year.
In 2013, when the U.S. Federal Reserve signalled it would start tapering the massive monetary stimulus it introduced after the global financial crisis, investors dumped emerging market assets, knocking around 13 percent off the rupee through the year.
On Wednesday the Fed gave another signal, indicating it was a step closer to raising interest rates, expectations of which have already led to a 25 percent rally in the dollar against a basket of currencies since last summer.
But tighter Fed policy won’t inflict much damage this time, according to ICICI economists A. Prasanna and Abhishek Upadhyay, as investors remain confident India’s economy is accelerating and Prime Minister Narendra Modi will deliver on much-needed reforms.
“The taper scare had a strong disciplining effect on India, and the macro vulnerabilities have diminished significantly,” said Upadhyay.
“The current account deficit, fiscal deficit and inflation are much lower, and the RBI has added to forex reserves. Growth is headed in the right direction as well,” he added.
India’s current account gap narrowed in the October-December quarter and is expected to turn to surplus in early 2015 for the first time in eight years, thanks to a stronger rupee and cheaper oil.
The rupee, Taiwanese dollar and Thai baht are the only emerging Asian currencies to have weathered the surging dollar and strengthened so far this year. Major currencies like the euro and sterling have depreciated heavily.
But ICICI’s economists are not as optimistic about growth as the government, and say investment demand is yet to rise significantly as commercial banks remain reluctant to pass on the RBI’s two rate cuts since January to customers.
The top forecaster rankings, compiled by StarMine, are based on a firm’s predictions for key economic indicators released in 2014.
StarMine aggregates individual data point accuracy scores for each contributor over all releases during the year to determine overall score and rank for each contributor in a given country.