RBI’s forex spends ‘reasonable’: S&P

MUMABI: S&P Global Ratings chief economist Paul Gruenwald has said that the extent of reserves depleted in defending the rupee is reasonable, given the environment. He also said that India is likely to be an exception to a near-universal slowing down of the large economies, and there is a relative degree of independence from the rest of the world due to its large market, but it is not immune to rate hikes by the US Fed.
According to Gruenwald, “75 was the new 25” for central bankers who were now raising rates by much higher amounts as against earlier increments of 25 basis points (100bps = 1 percentage point). “If you are an emerging market central banker, you cannot ignore the Federal Reserve and say you are focused on domestic condition. If the Fed goes harder and faster, central banks will at least partially shadow this,” he said, speaking to newspersons in Mumbai.
While a US tightening hurts emerging markets, India is better placed than it was during 2013. That was when it bore the brunt of the ‘taper tantrums’ that followed tightening by the Fed. “If you do a country ranking across emerging markets, India will be in the top buckets, regardless of what scenario we are in,” he said. On the adequacy of forex reserves, Gruenwald said that the RBI has spent roughly 10% of its forex reserves from its peak of $640 billion, which was a reasonable use of reserves. However, the RBI could only use the reserves to address volatility and not fight financial markets.
“The big three — the US,the Eurozone and China — are slowing for different reasons. Our view is that the US is a classic overheating economy. The output level is too high, meaning the economy is running above potential. The unemployment rate at 3. 7% is too low to be sustainable,” said Gruenwald. He added that the Fed was responding to this by raising interest rates to put the economy on a more sustainable path. In Europe, the big risk was around geopolitics and energy supplies, and it would take a couple of years to shift away from its reliance on Russian energy. In China, the slowdown was because of the zero-Covid policy, a self-induced slowdown.
“China is one of the upsides of global recovery,” said Gruenwald.