Watch out for global shocks

India may have to be watchful on financing of the current account deficit with the Reserve Bank of India signalling the risks posed by global imbalances and geo-politics.

Global imbalances encompass the trade and fiscal deficits of the largest economy, the US, which may well threaten a slowdown in growth in future. This, in turn, could impact other economies. On the geo-political front, the escalation of the ongoing conflict in West Asia may lead to a further surge in oil prices, impacting the balance of payments position of many economies.

The threat to India emanating from such global imbalances could also be in the form of a possible further monetary policy tightening in the US. If that happens, the capital flows into India and other emerging markets could be impacted. C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, had told ET recently that while some reduction in capital flows would not matter since forex reserves were high, the situation would have to be watched.

This is to ensure that the reduction is not of the order that could hinder the financing of the current account deficit. He had also suggested that steps should be taken to improve the competitiveness of the country’s exports so that any correction to the global imbalance was smooth and not abrupt.

According to AV Birla group chief economist Ajit Ranade, oil prices may not peak at $75 as expected. This could impact oil imports and inflation. Indirectly, higher oil prices may lead to monetary tightening globally and that could impact India, too.

ABN Amro Bank chief economist India Abheek Barua reckoned that the critical global factor which could have an adverse effect in India is oil prices. More negative news coming out of the Middle East could affect capital flows into emerging markets, including India.

Referring to the global imbalances especially in the US, Mr Rangarajan had said for a smooth adjustment, countries which had surpluses should encourage domestic consumption to trigger growth. Besides, they need to strengthen their currencies also.