Cold comfort

US Fed's assessment a net positive for India

The recent meeting of the Federal Open Markets Committee (FOMC) resulted in a status quo on interest rates. Normally, this would have been met with relief, even joy, by equity markets, but that was not the case this time. The reason was not so much the fact that the Fed funds rate was not raised; virtually no one expected that to happen. Rather, it was the very anaemic performance of the US economy in the January-March quarter. It barely expanded, by 0.2 per cent, in sharp contrast to the 2.2 per cent growth during the October-December 2014 quarter and 2.4 per cent for 2014 overall. This number comes as quite a disappointment for stakeholders in global growth, because the US was virtually the lone driver of growth among the developed economies. The critical question is whether this is a temporary aberration or a more persistent slowdown. Both independent observers and the Fed itself have been quite categorical in their assessment that this is really the result of a particularly severe winter, which contributed to both reduced consumer spending and sluggishness in the labour market. The FOMC's statement articulates the committee's view that this slowdown will quickly be shaken off and that the US economy will revert to the growth path that it had displayed last year. There are, of course, a few contraindications - most prominently the decline in exports, which is generally being attributed to the strength of the dollar. If this continues, export sluggishness will be a more persistent barrier to accelerating growth. The other big negative was growth in investment, which, again, may reflect forces other than just an abnormal winter.

Be that as it may, the implications of the FOMC's assessment and action are on the whole positive for emerging market economies, India in particular. While India's vulnerability to a reversal of capital flows in response to an interest rate hike in the US is significantly less now than it was two years ago, global investors are a skittish lot and, among other things, the tension over tax issues will not help. In this context, the FOMC statement carries two messages that should come as a relief to Indian policymakers. One, the Fed's anxiety over the slowdown in growth reduces the prospects of an interest rate action in the next few months. Two, the statement explicitly says that when the cycle begins, increases will be made in a very carefully calibrated manner so as not to disrupt forces of growth. This approach will also minimise disruption of global portfolio allocations.

Of course, a more persistent US slowdown is bad news for the rest of the world, because the other engine, China, is also slowing down, deliberately or otherwise. India's growth momentum will increasingly depend on domestic forces which, in turn, are contingent on a range of policy reforms and initiatives being carried out. Essentially, the government must appreciate the fact that it has an unparalleled window of opportunity over the next 12-18 months during which benign macroeconomic conditions can provide a strong platform for growth. Neither a cold winter nor a dry monsoon must be allowed to get in the way.