No cause for concern

US Federal Reserve Board Chairman, Alan Greenspan, has perfected the art of stating the obvious. In fact, so obvious that at times the global markets,which hang on to every syllable he utters, go into a tizzy wondering if he is trying to say something more profound.

When Greenspan told the US Senate on Tuesday that the risk of deflation had disappeared, he was only referring to the rise in the inflation rate for March.

So much for the obvious, but the markets "" for long eager to get a sense of the future direction of interest rates "" read it as a signal that the Fed might be moving to hike rates.

But before long, looking at the violent reaction in the global equity and bond markets, Greenspan indicated to a Congressional Joint Economic Committee on Wednesday, that high productivity rates and low inflation in the US would allow the Fed to keep interest rates at the current levels a bit longer.

For the Indian markets, this is good news. Low US interest rates will mean that portfolio investors will continue to look at the emerging markets for returns higher than they can get in the home markets.

So the flow of capital out of the US and other developed economies into the emerging markets should continue for some more time. But in keeping with the risk-reward tradeoff, most of these flows are seeking quality earnings.

With stronger economic fundamentals and a conservative monetary policy, India is increasingly becoming the destination of choice, as is evident in the recent decision by CalPERS to take a fresh look at India.

As for the domestic monetary policy and interest rates, nothing much should be expected in the wake of the US Fed's latest stance. The fact remains that Indian inflation levels are benign at around 4 per cent, forex reserves are at an all-time high and liquidity in the domestic banking system is comfortable.

All in all, there are no local pressure points that could prompt the central bank to hike rates in the near future. The Indian economy is much more integrated into world trade now than it was ever in the past.

So, there is little threat of domestic shortages putting any pressure on prices. True, with greater integration, the Indian economy also runs the risk of importing inflation but till such time as global inflation rates remain low, there should be little cause for concern. The domestic currency is largely stable; the central bank is in a position to check any sharp movement.

The short point is that the internal and external economies are reasonably stable which means the Reserve Bank of India has to be doubly cautious in attempting to mimic the US Fed.

While the US economy may be peaking in the productivity cycle, the Indian recovery is still nascent and too much is riding on low interest rates.

With the benefit of low rates, domestic banks have embarked on a strategy to clean up their balance sheets, with the net result that the Indian banking system is stronger today than it was three years ago. Corporate balance sheets are healthier, because companies have improved productivity levels, which in turn has reduced the demand for capital.