The Reserve Bank of India (RBI) has cautioned that the U.S. Fed’s taper will trigger some pullback of dollar-denoted capital from India to back home. As a result, New Delhi will have to find domestic sources for funding infrastructure for which the Modi government must align the policies that are holding up the project pipeline, especially in the energy sector, RBI Deputy Governor Urjit Patel told The Hindu.
The U.S. Fed voted on Wednesday to end its bond-buying stimulus or Quantitative Easing (QE) but left unchanged its pledge to keep American interest rates at near-zero levels for a ‘considerable time.’
In an interview to The Hindu prior to Wednesday’s announcement, Dr. Patel said: “This was inevitable and at some point had to happen… India will have to prepare for this normalisation due to which there will be some movement of capital back home to the U.S.”
When contacted on Thursday, Dr. Patel said his views remain unchanged after the Fed’s announcement.
“For India, the taper will imply that the funding for infrastructure will have to be domestic. And, if policies are aligned — especially on the energy side — we could be surprised by the uptick… This should be the main task — to square that circle,” he said.
Dr. Patel said policy changes would produce cash flows from projects in the pipeline and that would also bring in more private investments. “It is important to note that these assets are real and can quickly bring in cash for the banking system if we just fix two-three things such as power purchase and fuel supply agreements.”
India had got a taste last year of the kind of implications that the Fed’s decisions can have, Dr. Patel said. The announcement of the initiation of the QE reversal had triggered sharp volatility in the rupee-dollar exchange rate. He also said that India was better prepared now for the QE closure. “Since then we have higher reserves, lower current account deficit, easing inflation and we are on a path of fiscal consolidation… There is good news that prices of commodities such as crude, of which India is a big importer, are easing,” Dr. Patel said.
He, however, cautioned that the risk remains of the global economy being weak for longer still. “There is bad news too if global economy forecasts keep coming down and if the global economy does not break out of the ‘mediocre growth’ that has been talked about,” he said, referring to the IMF Managing Director Christine Lagarde’s warning earlier this month.