The stock markets have saluted the US Federal Reserve’s decision to leave the benchmark rates unchanged but they seem to have ignored the underlying message namely that global growth remains very fragile. Indeed, Chair Janet Yellen’s observation that the Fed would be monitoring economies overseas, as recent developments “may restrain economic activity somewhat” is a hint of the concerns the US central bank harbours on economies such as China, Russia and Brazil. A slower global recovery is bad news for India because exports—which have now fallen for nine months in a row—-will get further hit.
Already, a weaker yuan has made India’s exports less competitive and falling demand from markets like the Middle east and Europe could make life even more difficult for exporters. Falling exports will also weigh on the current account deficit.
As such, the cheer in the markets could be short-lived.
However, given CPI inflation appears to be on track to meet the Reserve Bank of India’s 6% target for January 2016—CPI in August came in at 3.66%, albeit on a low base, as governor Raghuram Rajan pointed out on Friday. Nevertheless, given the slowdown in growth, there’s every chance the central bank will trim the repo—currently at 7.25% —-at its monetary policy review meeting on September 29. While a 25 basis points cut is unlikely to spur either consumption or investment demand, it might prompt banks into trimming their base rates which, in turn, would ease the pressure on corporates, especially small and mid-sized ones.
The turmoil in China and the continuing weakness in the Eurozone and Japan, however, have left the currency volatile; should the rupee depreciate as the dollar strengthens, imported inflation will rise and could negate the positive impact of soft commodity prices.