AS THE global banking crisis continues to hit both sides of the Atlantic, emerging markets such as India must put a real premium on macro-economic stability — i.e. keeping inflation under control, continuing on the fiscal consolidation path, building buffers, and maintaining a close watch on financial stability — said Sajjid Chinoy, Chief India Economist, JP Morgan and Part-Time Member of the Prime Minister’s Economic Advisory Council.
“The second piece of advice — if there is some slowdown, let’s not panic… if there is high uncertainty around the world, it stands to reason that the private sector may well temporarily retrench, which means the public sector must continue with its capex for another year or so,” he said in conversation with P Vaidyanathan Iyer, Executive Editor, The Indian Express, at the Express Explained.Live online event on Thursday evening.
India, Chinoy said, had some natural hedge working in its favour. For instance, oil prices are inversely correlated with the US dollar index. So, when the dollar index rises and firms up, it impedes capital flows to India; but India’s current account is lower because oil prices are low. Two, when India’s exports slow down, then commodity prices soften; and as a large importer, India enjoys terms of trade benefits. The third hedge, he said, comes with a lower risk-free rate i.e., yield on 10-year bonds (following a 50-basis points reduction in 10-year US bond yield to 3.5 per cent last month) in India dropped, easing financial conditions with credit spreads remaining the same, unlike the US where it had risen.
According to Chinoy, the global banking crisis is different from the 2008 financial crisis in that although there is nervousness in the financial markets, the real economy is going very strong. Central banks have two main objectives going forward – bring inflation down since the economy is not slowing by itself, and avoid financial instability by ensuring the contagion doesn’t spread. And they have two instruments for these: i) interest rates for inflation and ii) regulatory tools such as liquidity, lender of last resort, forbearance, etc, he pointed out.
“JP Morgan attributes only a 20 per cent probability to a recession in July-August. The baseline case is there will be no recession in the next six months. Of the three outcomes in this baseline case, a soft landing looks unlikely,” Chinoy said.
“The other two possible outcomes are: i) credit will slow, banks will turn risk averse, the US Fed will finally find some traction in monetary transmission and rates won’t have to go up to 6 per cent, the economy will slow, and there is a mild recession later this year; and ii) credit conditions don’t tighten enough, the real economy is strong, inflation doesn’t come off, and the Fed has to keep going, go up to 6 per cent, and the economy sees a hard landing next year,” he said.
As far as the impact of the global banking crisis on India is concerned, Chinoy said, there is little to no direct exposure to stressed global assets and securities. However, if there is global risk aversion, capital flows to all emerging markets, including India, will tighten. Indian bond yields will also be impacted when global bond yields move, the latter have come down by about 50 basis points, he said.
If there is a global demand shock, this will lower commodity prices, which will benefit India. While exports will be impacted if there is a global slowdown, services will do well, although goods exports will take a hit, Chinoy said.
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