Emerging markets want the uncertainty to end

With all eyes on the crucial Fed decision, Bloomberg TV India’s Sunanda Jayaseelan caught up with Eswar Prasad, Senior Professor at Cornell University, to get a perception of what the US Central bank can do.

What are you expecting Janet Yellen to do on September 17?

It is a 50-50 call because many people in markets including some emerging market economies seem to be clamouring for the Fed to get started with the first move so that the uncertainty is taken out of the market. But while we have been waiting for this, there has been some tightening of monetary policy that has effectively taken place because of the low inflation rate in the US that has increased the real estate rates a little bit. Also the strength of the dollar has led to an effective tightening of monetary policy. So at the moment it is a very close call, especially given the turmoil in global financial markets which the Fed is going to take into account certainly.

Let’s talk about the reform process and the reform setback that we have been seeing here in India. Is it going to hit the sentiments as well as the macro data?

Certainly, India at least at this moment is not so much concerned about short-term growth. Whether India will use the window of opportunity being provided by an improving macro-economic position with inflation being somewhat under control with the fiscal deficit position looking a little better than it did 2-3 years ago and with oil prices staying very low, to push forward the reforms that are really needed to energise the manufacturing base in particular remains to be seen. I have less of a sense of optimism. Many of the reforms including the Land Acquisition reforms, reforms of the tax system including implementation of the GST seem to have come to a grinding halt in addition to broader governance reforms that are essential for the Indian economy.

Let’s talk about RBI Governor Raghuram Rajan and what role he really has to play since he is stuck between the reforms setback and impending Fed hike.

My view is that the RBI has done a very good job in terms of what it can manage, which is inflation, and try to provide a stable macro-economic base for other reforms to have a positive effect on the growth. But, the reality is that in most of the countries, the central banks cannot do everything by themselves and try and support growth in short term. That is an important objective of course, but it has to come in tandem with other macro-economic policies and in tandem with structural reforms.

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