Currency risks a concern for India: Moody’s Analytics

Currency risks could deter India’s recovery leading RBI to raise rates and slowing down the economy, Moody’s Analytics pointed on Thursday.

Affirming that the outlook for emerging markets will hold even amidst the US banking storm, Moody’s Analytics said that while India would continue to grow owing to pent-up demand, “further currency weakness could put the region’s central banks in a bind.”

“A new bout of rupee weakness could force the Reserve Bank of India to press harder on the brakes slowing what we expect to be one of EM Asia’s best performing economies,” the report said, highlighting that even though inflation was no longer rising, food prices were still a key concern.


The Reserve Bank of India’s Monetary Policy Committee had raised rates by 0.25 percentage points to 6.5% in its February meeting.

“Although the meeting’s minutes showed only one member concerned with the Fed’s pace of tightening, this could quickly change when the bank meets in April, especially if faster Fed tightening and market jitters cause the rupee to weaken further,” the report noted.

The Federal Reserve raised rates by 0.25 percentage points on Wednesday. The Fed policymakers expect another rate hike to tame inflation.

In India, expectations of a rate hike increased after inflation print remained above the RBI’s 2-6% target for January and February.

Economists are also pencilling in a 0.25 percentage point rate hike from the MPC in the coming meeting.

Global outlook

On the global front, Moody’s Analytics pointed out that even though portfolio flows to emerging markets had slipped into reverse post the banking crisis raising concerns about a broader global recession, it was “too early to call the curtains on EM recovery”.

“We are sticking to our call for most major emerging economies to grow this year,” Jesse Rogers, an economist at Moody's Analytics said, pointing that economic rebound in China, return of growth in Europe, and “a Federal Reserve that must now balance risks to financial stability as well as inflation” would support growth in emerging markets.

The financial service provider did note that the emerging economies despite strong buffers were vulnerable.

“Despite our relatively positive view on the EM landscape, the events of the past few weeks reveal cracks in the insulation…when the going gets tough, they (emerging markets) are punished unfairly with currencies and monetary policy ultimately shackled to the Fed,” the report said.