finance ministry: India’s economy faces risks from the external sector, says finance ministry

finance ministry: India’s economy faces risks from the external sector, says finance ministry

India’s fiscal and monetary authorities must remain watchful as prospects of an extended period of subdued global growth and trade, and continuous hike in US interest rates cast a pall of uncertainty over India’s external sector, the finance ministry said on Saturday.

“The globalised nature of India’s economy portends that even as inflationary pressures abate, another challenge to macroeconomic stability will rear its head in the form of external sector pressures,” the finance ministry said in its monthly economic review for September.

The ministry flagged that foreign capital inflows could be hurt as the US monetary authority tightens monetary policy, while India and the world faces concerns about elevated global energy prices in the near-term.

Federal Reserve’s persistent rate hikes may deter capital inflows, increase pressure on the Rupee to depreciate, and make imports of essential commodities costlier. Also, an unfavourable global economic outlook is bound to moderate the growth of exports, affecting the country’s trade balance, the ministry added.

The report said that export growth in the second quarter of this fiscal year that started Apr. 1 has plateaued coinciding with moderation in international trade, declining consumer spending in advanced nations, and aggressive monetary policy tightening, all combining to reflect a bleak global economic outlook in the year ahead.

In some cases of manufacturing exports, India is also supply-constrained, it added.

The outlook is also worrisome as the WTO forecasts the world trade to lose momentum in the second half of 2022 and remain subdued in 2023 as multiple shocks continue to weigh on the global economy.

On the flip side, merchandise imports are showing no signs of letting up, driven by elevated global commodity prices along with sustained recovery and growth of the Indian economy, the ministry said.

Meanwhile, the current uncertainty, wrought by geopolitical tensions, monetary policy tightening by Fed, and widening CAD, has exerted pressure on the Rupee-USD exchange rate.

US Federal Reserve has hiked interest rates by 75 basis points for three straight times in recent months to tame decades-high inflation. The US monetary authority is expected to go for more such steep hikes after red-hot September inflation print eased bets for a downshift by the end of this year.

The aggressive rate hikes by the US and by other global central banks have, among other factors, dragged India’s rupee to a record low against the greenback while foreign institutional investors have also withdrawn thousands of crores of rupee from the Dalal Street. The global commodity price spike has also driven India’s inflation print and all of these colluded to force the domestic rate-setting panel to hike policy rates in tandem.

India’s local currency has taken a beating and has moved pass the 83 level against the greenback to fall to its record low. India’s Finance Minister Nirmala Sitharaman recently said it is more about the dollar strengthening than the weakness in the rupee.

However, apart from the role that Fed hikes played, the ministry today said that local reasons such as the sensitivity of capital flows to changes in Fed rates and dependence on fuel and food imports, whose prices have risen following the outbreak of the Russian-Ukraine conflict, have also played a role in the depreciation of currencies against the USD.

“However, unlike the taper tantrum in 2013 when the US Dollar has strengthened against the currencies of most of the EMEs, the macroeconomic fundamentals of the Indian economy are now stronger and forex reserves are ample,” the report said.

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