Uncertainty on US Federal Reserve's stance and actions can adversely impact demand in India: RBI paper

A paper written by Reserve Bank of India executives said on Friday that the uncertainty around US Federal Reserve’s stance will have an adverse impact on the aggregate demand in India. It also asked major central banks to be wary of their actions and communication, saying the same have a bearing on emerging markets.

The RBI document observed that “destabilisation in one region or group of countries can derail the process of global economic recovery from the pandemic.”

The paper stated that changes in US Federal Reserve monetary policy stance have bearings on the Indian economy as it can alter inflation and domestic output.

“Heightened uncertainty around the stance and actions of the US Federal Reserve is estimated to reduce aggregate demand in the Indian economy,” the paper added.

US’ economic growth is largely expected to drop to 6 per cent or even lower in FY24. And the US Fed has been hiking interest rates to record levels in order to cool inflation.

Highlighting “key challenges” for emerging market economies, the RBI paper pointed fingers at cross-border transmission of economic shocks arising from changes in the macroeconomic policy stance in major advanced economies . 

It said that the global economic system is staring in the eyes of a deadly storm today amidst a global pandemic that has affected millions of lives and livelihoods, a bounce back of high inflation, heightened uncertainty due to geopolitical tensions and a rollback of ultra-accommodative policy support across the globe.

It explained that emerging market economies not only have to support the domestic economy but must also safeguard themselves against spillovers from advanced economies.

The paper said it used quarterly macro-financial data on the US and Indian economy to shed light on the effects of US monetary policy actions as well as monetary policy uncertainty on the domestic economy.

“Importantly, we show that monetary policy actions (or uncertainty) of the US Fed can have detrimental effects on the domestic business cycle,” it said.

“…The global economy would be better served if major central banks strive to minimize disruptions caused by their policy actions through transparent communication on the future path of their policy,” it added.

However, the paper made it clear that the article published in the monthly bulletin does not represent the RBI views.

(With PTI Inputs)