Finance Ministry: Indian economy faces external sector risks, says Finance Ministry

India’s fiscal and monetary authorities must remain vigilant as the outlook for a prolonged period of weak global growth and trade, and the continued rise in U.S. interest rates cast a shadow of uncertainty over India’s external sector, India said on Saturday. the Ministry of Finance.

“The globalized nature of the Indian economy suggests that even if inflationary pressures ease, another challenge to macroeconomic stability will come in the form of pressures on the external sector,” the finance ministry said in its review. September monthly economic.

The ministry warned that foreign capital inflows could be affected by monetary policy tightening by the US monetary authority, as India and the world face concerns over high global energy prices at short term.

Persistent Federal Reserve rate hikes could discourage capital inflows, increase pressure on the rupee to depreciate and make imports of essential goods more expensive. In addition, an unfavorable global economic outlook is expected to dampen export growth, affecting the country’s trade balance, the ministry added.

The report said export growth in the second quarter of this fiscal year that began April 1 plateaued, coinciding with moderating international trade, lower consumer spending in advanced economies and aggressive monetary policy tightening, all combining to reflect a bleak global economic outlook. in the coming year.

In some cases of manufacturing exports, India is also constrained by supply, he added.

The outlook is also worrisome, as the WTO predicts that global trade will lose momentum in the second half of 2022 and remain subdued in 2023 as multiple shocks continue to weigh on the global economy.

On the other hand, imports of goods show no signs of slowing down, driven by high global commodity prices as well as the steady recovery and growth of the Indian economy, the ministry said.

Meanwhile, the ongoing uncertainty, caused by geopolitical tensions, the Fed’s monetary policy tightening and CAD enlargement, has put pressure on the rupee-USD exchange rate.

The US Federal Reserve has raised interest rates by 75 basis points three times in a row in recent months to bring inflation, which has been high for decades, under control. The US monetary authority is likely to opt for more such steep hikes after September’s searing inflation print eased bets for a slowdown by the end of this year.

Aggressive rate hikes by the United States and other global central banks have, among other factors, driven the Indian rupee to a record high against the greenback, while foreign institutional investors have also pulled thousands of crores out of rupees from Dalal Street. Soaring global commodity prices have also driven India’s inflation and all of this has combined to force the domestic rate-setting group to raise policy rates in tandem.

India’s local currency took a hit and broke above the 83 level against the greenback to fall to its all-time low. Indian Finance Minister Nirmala Sitharaman recently said it was more about the strengthening dollar than the weak rupee.

However, in addition to the role the Fed hikes have played, the department said today that local reasons such as sensitivity of capital flows to changes in Fed rates and reliance on imports of fuel and food products, the prices of which rose following the outbreak of the Russian-Ukrainian conflict, also played a role in the depreciation of currencies against the dollar.

“However, unlike the taper tantrum of 2013, when the US dollar strengthened against currencies of most EMEs, the macroeconomic fundamentals of the Indian economy are now stronger and foreign exchange reserves are plentiful,” it said. The report.