On strong ground

On strong ground

FPJ BureauUpdated: Saturday, June 01, 2019, 03:06 AM IST
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The suspected rate increase by the US Federal Reserve Bank might have been pretty long in coming but it does seem to be around the corner now. Last week, the Open Market Committee of the Fed met and took a significant decision. It deleted a key word, ‘patience’, from its policy stance on bank rate for the first time in years. This was the strongest indication that Fed’s zero interest rate policy might be about to change. Though the Fed had cautioned that after it fully tapers off quantitative easing, it might consider increasing the bank rate, this had been put off from one meeting of the OMC to the next, beginning from the time Janet Yellen took charge early last year. Since then, the US economy has further improved, offering conditions for change in the zero interest rate policy. It is notable that given the stellar role of the US dollar in the global economy, all along, the Fed had taken care to keep the surprise element out of its policy stand on rates. Yellen and her predecessor, Ben Bernanke, had given early notice of ending quantitative easing. Since the Fed issued government paper to increase liquidity to boost sentiment, this caused billions of dollars to flow in diverse markets, including India. Indeed, in the initial stages there were tremors in the Indian stock exchanges when the Fed first talked of an end to quantitative easing. Since then, the Indian share markets seem to have factored in that the Fed might soon be thinking of raising the rates. Hence, the somewhat lukewarm behaviour of the Sensex in recent weeks.

The Fed has clearly been enthused by the good news on the jobs’ front in the US. For the first time in several years, the employment rate in the US is down to manageable limits. The US is probably the only major economy in the western world which is set to grow at a decent three per cent per annum, while the European economies are in the grip of a sharp slowdown and even the Chinese economy is set to register a noticeable drop in growth. Admittedly, under the able stewardship of Raghuram Rajan, the RBI has fortified itself against the likely upward revision in the Fed rate. Happily, the current account deficit is down thanks to a sharp drop in the prices of crude oil and commodities. The rupee is more or less stable against the dollar while it has gained significantly against the Euro and the British Pound Sterling. The European Union being India’s single largest trading partner, a strong rupee can further dampen exports, especially when the EU economies are facing internal problems, including continuing differences with Greece over re-arranging its debt to Germany and the European Union Bank. It is remarkable that the RBI has in recent months taken a conscious decision to bolster foreign exchange reserves further in order to be able to meet any eventuality, including the feared EU crisis in the event of failure to reach settlement with Greece. On the whole, global conditions seem to be quite benign for the Indian economy, though we need to be prepared for sudden changes in crude and commodities prices.

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