New bout of rupee weakness could force RBI to press harder on the brakes: Moody’s Analytics

Moody’s Analytics has cautioned that a new bout of rupee weakness could force the Reserve Bank of India to press harder on the brakes, slowing what it expects to be one of EM (Emerging Market) Asia’s best performing economies.

Analysts with the firm observed that the risk of currency weakness in emerging Asia is especially worrisome given its status as the cradle of the EM recovery.

“Our outlook calls for economies in emerging Asia to handily outperform the rest of the EM cohort, as China’s rebound gains momentum and as pent-up demand, still on hold from the Delta wave in India and South-East Asia, props up consumer spending,” Moody’s Analytics said in a report.

But further currency weakness could put the region’s central banks in a bind.

“Nowhere is this risk greater than in India, where a new bout of rupee weakness could force the Reserve Bank of India to press harder on the brakes, slowing what we expect to be one of EM Asia’s best performing economies,” the analysts said.

Monetary policy

They noted that policymakers raised rates in the bank’s February meeting, which was marked by rare dissent from two of the bank’s six board members.

While inflation is no longer rising, higher food prices are a key concern, they added.

“Both dissenting members advocated a pause to assess the impact of previous tightening on the economy, and to rely on incoming data to inform further hikes.

“Although the meeting’s minutes showed only one member was concerned with the Fed’s pace of tightening, this could quickly change when the bank meets in April, especially if faster Fed tightening and market jitters cause the rupee to weaken further,” the report said.

The firm underscored that Emerging Markets (EMs) are not in the eye of the storm coursing through the US banking sector, but are in its orbit.

“Major emerging market currencies were mostly unchanged in the days following the closure of Silicon Valley Bank and the spread of liquidity troubles to other US regional banks and Swiss banking giant Credit Suisse.

“But portfolio flows to emerging markets, a key gauge of sentiment toward emerging economies and a prime mover of EM stocks, currencies, and bonds, slipped into reverse after staging a wholehearted comeback in January and February,” the analysts’ said.

Positive outlook on emerging economies

While the flow’s reversal raises concern about a broader global recession and its repercussions for emerging markets, it is too early to call for the curtain on the EM recovery, they added.

“Grounded by our conviction that the US banking system will hold firm, we are sticking to our call for most major emerging economies to grow this year.

“They will be supported by China’s economic rebound and the return of growth in Europe, and a Federal Reserve that must now balance risks to financial stability as well as inflation,” the report said.

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