Jyotinder Kaur

The more dovish-than-expected guidance given by US Federal Reserve Board Chairperson Janet Yellen at the conclusion of the latest FOMC meet on March 18th has provided some relief to emerging market (EM) assets that had come under quite a bit of strain in the run-up to the review. The risk of an early lift-off in policy rates (some sections of the market had built up expectations of a hike in the Fed funds rate in June) appears to have been dissipated for now with the central bank’s forward… Show more

The more dovish-than-expected guidance given by US Federal Reserve Board Chairperson Janet Yellen at the conclusion of the latest FOMC meet on March 18th has provided some relief to emerging market (EM) assets that had come under quite a bit of strain in the run-up to the review. The risk of an early lift-off in policy rates (some sections of the market had built up expectations of a hike in the Fed funds rate in June) appears to have been dissipated for now with the central bank’s forward guidance that it would raise policy rates when it has seen “further improvement in the labour market and is reasonably confident that inflation will move back to its 2.0% objective over the medium term”. Given the current run-rate of both headline and core inflation in the US, this could take a while longer. However, the most recent bout of market stress has again highlighted the fact that when the final lift-off in US policy rates does happen, there will likely be initial and somewhat disorderly spillover effects on emerging markets (EMs).
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The details of the agreement between the RBI and the government on the central bank’s revised monetary policy framework adopting “flexible inflation targeting” were released earlier this week. This is a positive development and one that institutionalizes the monetary policy framework of the RBI by lending it transparency and accountability. However, while some may relate the adoption of inflation targeting by the RBI to a shift towards mechanical “rule” based policy making we would caution… Show more

The details of the agreement between the RBI and the government on the central bank’s revised monetary policy framework adopting “flexible inflation targeting” were released earlier this week. This is a positive development and one that institutionalizes the monetary policy framework of the RBI by lending it transparency and accountability. However, while some may relate the adoption of inflation targeting by the RBI to a shift towards mechanical “rule” based policy making we would caution against jumping to this conclusion. The way we see it, the flexible inflation targeting framework is best described as policy making with “constrained” discretion-a framework in between the more rigid dictates of rule-based monetary policy and the ad-hoc nature of discretionary monetary policy that many believe the RBI followed before January, 2014 (when flexible inflation targeting was informally adopted by the RBI).

It is in fact the persistence of some element of judgment in monetary policy making, constrained as it may be but discretion nonetheless, that is the most important element of the agreement. The question is--should this judgment call be made solely by the central bank governor or should it be a more collective exercise by a group of experts?

This is where details on the second part of the originally proposed monetary framework – the creation of a Monetary Policy Committee (MPC)- are conspicuous by their absence.At first glance, the lack of clarity around the MPC might seem like a trivial matter. However, the fact that it is likely to be the key decision making body under the new flexible inflation targeting framework means that it has serious implications for the extent of policy easing going ahead. Show less

As we step into the last quarter of the current fiscal year, nervousness over the government’s precarious fiscal position has intensified. At 99.0% of the budget estimate (BE), the centre's fiscal deficit between April-November, 2014 has nearly hit the full year target in the first eight months of the fiscal year itself. There is, as a result, considerable uncertainty over the government’s fiscal consolidation path and whether the imperatives of supporting domestic growth will prevail over the… Show more

As we step into the last quarter of the current fiscal year, nervousness over the government’s precarious fiscal position has intensified. At 99.0% of the budget estimate (BE), the centre's fiscal deficit between April-November, 2014 has nearly hit the full year target in the first eight months of the fiscal year itself. There is, as a result, considerable uncertainty over the government’s fiscal consolidation path and whether the imperatives of supporting domestic growth will prevail over the need to defend the FY15 deficit target. Our guess is that while the centre might just stay within this year’s 4.1% of GDP fiscal deficit target, it may not necessarily come at the cost of substantially lower growth.

If at all there is any fiscal slippage, it could take the form of a less stringent target in FY16. The market implications of this divergence from the original medium-term consolidation path outlined in the FY15 budget could however be limited, especially if the government clearly attributes the slippage to greater capital outlays and development spending. Show less

The sharp fall in international oil prices in recent months has significant implications for global growth. Oil and commodity exporting countries are likely to see a downgrade in growth prospects going ahead while net commodity importers could see an improvement in domestic consumption that could eventually lift growth forecasts over next year. As varied as the impact could eventually be, depending on which side of the trade equation a country is at, no nation can discount the role of rapidly… Show more

The sharp fall in international oil prices in recent months has significant implications for global growth. Oil and commodity exporting countries are likely to see a downgrade in growth prospects going ahead while net commodity importers could see an improvement in domestic consumption that could eventually lift growth forecasts over next year. As varied as the impact could eventually be, depending on which side of the trade equation a country is at, no nation can discount the role of rapidly changing oil prices in altering the perceptions about growth that they started 2014 with. However, falling oil prices do not have macroeconomic consequences alone. They also have equally significant ramifications for financial markets and global liquidity that appear to have received far less attention so far.As we step into the New Year it might serve us well to remember the risks that could shape financial market volatility going ahead.
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Global recovery remains below expectations and has proven uneven across major advanced economies. Monetary tightening in an increasingly dynamic US and potential deflation in a weak
Euro-zone constitute sources of risk for developing and emerging market economies alike. Nonetheless,developing country growth remains fairly robust. Notably, India’s growth rate is slowly increasing and its inflation rate is on a declining trend. While South Asia’s external position has been further solidified… Show more

Global recovery remains below expectations and has proven uneven across major advanced economies. Monetary tightening in an increasingly dynamic US and potential deflation in a weak
Euro-zone constitute sources of risk for developing and emerging market economies alike. Nonetheless,developing country growth remains fairly robust. Notably, India’s growth rate is slowly increasing and its inflation rate is on a declining trend. While South Asia’s external position has been further solidified, key domestic challenges include reducing fiscal risks, supporting higher levels of investment and sustaining export growth. Show less