In late December, RGE Managing Director Arnab Das sat down with Thompson Reuters to discuss the year ahead for India. Following strong inflows in 2012, Das noted that “the global environment has become much more supportive of risk-taking and fund flows to EMs, and India has benefited from that as a very high-beta play,” but emphasized the importance of continued progress on fiscal and structural adjustment to ideally create “an environment in which direct investors and corporations come to India, and portfolio flows piggyback on the increasing integration of India into the global economy,” rather than a less-predictable portfolio-flow-driven economy.
Regarding the ongoing U.S. fiscal cliff negotiations (but recorded before Congress reached the mini-deal), Das expected that a bargain would be reached, but permitted the “meaningful tail risk that that deal is not reached” by February—a risk that is still significant, as the sequester and debt-ceiling loom in the next calendar month. While turmoil in the U.S. would naturally have flow-on effects for the rest of the world, Das did not expect any surprises on the fiscal front in India, saying, “The government has sent the signal that it will roughly keep the budget where it is, so effectively tighten as the economy slows further,” and explaining that while some fiscal slippage is inevitable, too much amid global instability could see “meaningful” consequences in the markets, “because of the portfolio financing hot money flows that are holding up the rupee, the equities [market] and, increasingly, the bond market.”
Lastly, he touched on geopolitical risk and glanced ahead at Indian monetary policy, determining that Middle East risk will remain elevated, presenting an upside risk to inflationary pressure via the imported price of oil, which could require a tighter monetary policy. He concludes that the RBI will cut rates by 50 basis points in Q1 CY2013 and by 25 bps every quarter in 2013.
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