Risks of US Banking Crisis, Global Slowdown to India’s Economy


Risks of US Banking Crisis, Global Slowdown to India’s Economy

Speaking on the bank crisis in US and Europe, Finance Minister Nirmala Sitharaman thinks “since the last one-one and a half year, gradually our central bank is decoupling itself—not that it was entirely linked with the US Fed even earlier.”

Contagion risk, “if you go by the rule book, if all central banks are responding to the Fed’s action almost sequentially, and as a result you find Europe being more exposed to the chance of coming under recession.”

For India, “I would think the contagion risk is not really a problem, but the risk is there in the sense when markets to which you export are coming under recession. Then the demand is going to fall, your exports are going to suffer. So that risk is definitely there. But the contagion risk usually linked to the conduct of the central banks, I would think is not there for us to face.”


Impact on India

The above is the official Indian view. Sajjid Chinoy, Chief India Economist, JP Morgan, and part-time member, PMEAC PM’s Economic Advisory Committee), commenting on the US banking crisis, global slowdown and what it means for India, states “There are multiple transmission channels from current global events to India: the impact through exports, commodity prices, capital flows, US bond yields on Indian bond yields and changing risk premia from increased uncertainty. We will need to keep a close eye on all these channels of transmission and how they interact with each other.

On impact on exports: “At some point the global economy will be forced to slow, to generate the needed disinflation, and that will impact all emerging markets. So we should brace for slowing goods exports later this year. What’s new and exciting, however, is the dynamism that service exports have shown, not just software services but other IT-enabled services. Increased digitalisation during the pandemic and an acceptance of work-from-home has increased the attractiveness of offshoring and made services previously deemed non-tradeable to become tradeable.”

Consequently, India’s service exports have surged from $85 billion pre-pandemic to almost $150 billion in FY23. To the extent that there is a structural element to this increase, it could partially mitigate some cyclical headwinds. The surge in service exports, along with softening of commodity prices, has also contributed to a dramatic compression of the current account deficit (CAD) from almost four per cent of GDP mid-last year to a small surplus last quarter. That said, exports have been key to India’s recovery and a sharp global slowdown will create headwinds for them.

“Also, elevated global uncertainty is likely to keep some private investment on the sidelines for now. Other drivers of demand will, therefore, have to do the heavy lifting….”

In short, Chinoy states “India will not be immune to what’s happening globally….”

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