Interest rates may remain high for a long time even as central banks around the world are beginning to pivot toward lower interest rate increases or even a pause amid signs of peaking inflation, said Reserve Bank of India (RBI) Governor Shaktikanta Das.
“With some ebbing of Covid-related restrictions and cooling of inflation in various countries, though still elevated, central banks have started what appears to be a pivot towards lower rate hikes or pauses,” Governor Das said at the annual conference of Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers’ Association of India (PDAI). “High policy rates for a longer duration appear to be a distinct possibility, going forward.”
This is probably the first signal from the central banker that global factors are getting less tight for the first time in nearly a year when inflation around the world forced central banks to tighten monetary conditions. While inflation still worries developed world, in India it appears to be tapering though external spill overs remain a threat.
India’s market participants will have to prepare themselves to manage the changes and risks associated with globally integrated markets. Greater challenges will emerge as the footprints of Indian banks increase in the offshore markets, the range of products expand, nonresident participation in domestic markets grows and as capital account convertibility increases.
He said though India’s inflation remains elevated, there has been a welcome softening during November and December 2022. India’s retail inflation dropped to 5.88% in November from 6.77% in October falling below 6% for the first time in more than three quarters. It further fell to a 12-month low of 5.72%.
On the growth front, projections are now veering around to a softer recession as against a severe and more widespread recession projected a few months back. In this hostile and uncertain international environment, the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals, Das said.
Das said as de-globalisation and protectionism are gaining ground around the world, it is necessary for India to build and strengthen bilateral trade relations. “The average current account deficit to GDP ratio stands at 3.3% during H1:2022-23.The slowing global demand is weighing on merchandise exports; but our exports of services and remittances remain strong. The net balance under services and remittances remains in a large surplus, partly offsetting the trade deficit. Consequently, the current account deficit is eminently manageable and within the parameters of viability,” Das said.
The Governor also said that the rupee’s volatility during the Covid-19 pandemic was less than previous crisis with the one-month implied volatility touching 25% during the global financial crisis on October 10, 2008 and 20% during the taper tantrum period on August 29, 2013.