Home' Trinidad and Tobago Guardian : January 14th 2016 Contents BG20 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 14 • 2016
Further interest rate hikes by
the US Federal Reserve should
be gradual or they risk hurting
already fragile emerging
economies, where many com-
panies borrow in dollars, the
head of the International Mon-
etary Fund said on Tuesday.
Christine Lagarde said a
tightening in US monetary pol-
icy, which started last month
with the first rate hike in a
decade, should be supported
by "clear evidence" of inflation
in the United States. She high-
lighted the negative implica-
tions for emerging economies.
"The key issue going forward
will be the pace of normalisa-
tion. We agree that it should
be gradual as announced, as
stressed actually by the Fed,
and based on clear evidence of
firmer wage or price pressures,"
she told a central banking con-
ference in Paris.
Ebbing confidence in China's
policymaking has fuelled
investors' retreat from the
slowing economy and other
emerging markets, which had
attracted hundreds of billions
of dollars over the previous
decade thanks to their superior
returns over sluggish developed
Lagarde said higher US rates,
combined with easing in the
euro zone and Japan, could
push up the dollar, making life
harder for the many companies
in emerging economies that
borrow in dollars.
"For emerging economies,
this could raise vulnerabilities
in sectors with dollar expo-
sures, especially corporates,"
The Chinese yuan has
depreciated more than one per-
cent since the start of the year,
raising uncertainty over China's
intentions regarding the
exchange rate and strengthen-
ing concerns Beijing might be
losing its grip on economic pol-
icy, just as the country looks
set to post its slowest growth
in 25 years.
Lagarde warned about fur-
ther, sharp swings in exchange
rates due to uncertainty about
economic policy and the pace
of the economy.
"Beyond dollar appreciation,
there is also the potential for
increased exchange rate volatil-
ity," she said.
"This volatility could be
induced not only by the diver-
gence in monetary policies in
major advanced economies, but
also by uncertainty about their
overall prospects and policy
You know a country has it good
when the worst news to emerge
in the last year is a warning that
economic growth could slow---to
7.0 per cent.
Such is the situation in India, which is enjoying
a remarkable combination of good luck and fun-
damental strengths that include a popular prime
minister in the form of recently elected Narendra
Modi, a growing consumer market and its emerging
market cohorts in Brazil, Russia and China (BRICs)
faltering in a way that has unsettled investors
around the globe.
India's successes have led to the country's
becoming what political scientist and geopolitical
expert Ian Bremmer recently referred to as "the
last BRIC standing."
Around the world, Brazil is mired in political
scandal and battling both recession and surging
inflation, China's economic struggles have roiled
markets worldwide, and Russia's economy is strug-
gling to shake off the effects of economic sanctions
and plunging crude prices, which this week touched
Not so for India, the world's largest democracy,
which is home to more than a billion people and
is currently a darling of investors.
"In contrast to other major developing countries,
growth in India remained robust (last year), buoyed
by strong investor sentiment and the positive effect
on real incomes of the recent fall in oil prices," the
World Bank said last week. Highlighting the coun-
try's relative outperformance to other BRIC
economies, the organisation cut its global growth
estimates but forecast a 7.8 per cent growth rate
in India for 2016.
Growth holds up, for now
With its US$2 trillion economy, India looks well
situated to weather higher US interest rates in
2016, a factor many market watchers and analysts
point to as a fulcrum for emerging market fortunes.
And unlike China or South Africa (another formerly
high-flying developing economy lumped in with
the BRICs), India's growth does not seem to be
too much of a concern.
"Indian economic growth is holding up," said
William Adams, senior international economist
with PNC Financial Group, whose growth forecasts
for India are slightly less rosy that the World Bank's.
"The Reserve Bank of India's inflation targeting
regime is increasing the credibility of Indian eco-
nomic policy," he said, pointing out that inflation
last year fell to its lowest level in more than a
decade. With the so-called "commodities super-
cycle" giving way to a bear market, low global
commodity prices should keep inflation low and
growth strong in India.
"As a net commodity importer and consumer,
low prices of coal, oil, iron ore and other basic
materials should contain India's inflation, shrink
its trade deficit, boost consumer spending power,
support corporate profit margins, and raise headline
real GDP growth," Adams added. It should also
help keep India's currency, the rupee, stable against
other currencies, Adams said.
Still, there are some clouds on the horizon. The
MNI India Business Sentiment, a monthly poll of
Indian business executives at companies listed on
the BSE (formerly known as the Bombay Stock
Exchange), showed last month that Indian business
sentiment eased for the second consecutive month
in December amidst a "weak demand backdrop."
Meanwhile, China is now India's largest trading
partner, and a prolonged slump in the world's sec-
ond-largest economy would have serious impli-
cations for a bilateral trade relationship worth at
least US$70 billion.
Yet India's balance sheet has improved since
the "taper tantrum" of 2014---fears of a less activist
Federal Reserve---sent shockwaves across developing
According to Rachel Ziemba, managing director
of emerging market research at Roubini Global
Economics, India is more resilient to external
shocks like changes in US monetary policy.
The country "has sharply reduced debt service
costs and short-term external financing needs and
continued to attract capital," Ziemba said. "We
tend to think India is moving in the right direction
slowly. There are some modest fiscal and invest-
ment reforms but the risk is just that---things are
moving too slowly."
Ziemba added that the government led by Modi
has struggled to use its political capital, which
may depreciate as Modi's honeymoon gradually
The country's lack of reliance on commodities
has also left it in a better spot. India's economy
is heavily reliant on fossil fuel imports, and ranks
as the fourth-largest energy consumer in the world,
according to the Energy Information Administra-
The sharp drop in crude and natural gas prices
has helped curb India's estimated US$120 billion
annual energy bill, keep inflation in check and
assisted the government in targeting its spending,
Roubini's Ziemba said. AP
India has defied the emerging
market slump. Can it last?
Fed hikes need
to be gradual,
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