No change in RBI policy despite US jitters

While the downgrade on the US economy may not be a major cause for concern, the slowing growth and dampening economic data is, economists say.

For the first time in its history, leading rating agency Standard and Poor’s announced a “negative” outlook on the US debt, cutting down its rating from AAA to AA- plus, leading to much speculation in  the global financial markets.

But will this push the Reserve Bank of India to reconsidering its anti-inflationary stance and pause its rate hike spree? Experts would disagree. Most economists think that the RBI will continue with another 25 basis points hike in key intererst rates, however the aggression may fizz out slightly.

“Ever since 2008, most central banks in emerging markets take a 6 - 12 month view before reviewing their monetary policies. The RBI has time before its next monetary policy review therefore it can afford to take a wait and watch approach before taking a decision,” said Siddhartha Sanyal, chief economist with Barclays Capital.

The slowdown in US growth will affect India in two possible ways, says Samiran Chakraborty, chief economist with Standard Chartered Bank. The commodity prices may correct going ahead which will be positive for India.

“The negative impact might be that confidence among investors may be weakened,” Chakraborty says.

Though most economists do agree that there will be some minor impact on the Indian financial markets considering the dampening sentiments among investors. This eventually lead to an increased volatility in capital flows and may cause some pressure on the rupee.

Commodity prices will play a major role in deciding where RBI will proceed with its interest rate hike. A sharp correction in prices will fizzle out inflationary pressures and may force the RBI to reassess its position, experts say.

“Even if crude and commodity prices show a sharp correction in the near future, there are certain factors like fuel price hike, local pricing of food pricing and such which will keep inflationary pressures persistent to an extent. Thus we can expect inflation to stay high over the coming months,” argues Gaurav Kapur, chief economist with Royal Bank of Scotland.