India needs to stick to pro-growth policies to counter external headwinds: Mohamed El-Erian, Allianz SE

In an interview with ET Now's Tanvir Gill, Mohamed El-Erian, chief economic advisor, Allianz SE, explains why this rate hike could be the "loosest tightening" in Fed's history. Excerpts:

Q: The Fed seems confident of US inflation moving up, and has therefore kept the median end-2016 funds rate unchanged. How are you reading into the Fed commentary — sufficiently dovish or cautiously hawkish?

A: The Fed’s statement, and the press conference that followed, did a good job in striking a delicate balance that has helped avert market anxiety and financial turmoil.

The end result — a rate hike delivered in a dovish wrapping — is part of what will be the "loosest tightening" cycle in the modern history of the US Federal Reserve.

Q: The word "accommodative" is still part of Fed's policy stance, which has traditionally fuelled equity markets — especially EMs like India. Is the rebound in EMs to continue as the Fed moves slowly on rates? Will flows into India and other EMs continue in 2016?

A: Emerging economies are having to navigate a particularly fluid global environment characterised by "unusual uncertainty". This includes growing divergence in the policies of systemically-important central banks. On the one hand, the Fed is reducing its stimulus while others — such as the ECB, Bank of Japan and PBoC — will increase theirs.

As such, it is tricky to apply historical examples. The key is for countries like India to reduce their vulnerability to external vagaries by maintaining a balanced pro-growth policy approach.