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Systematix Research Report
We examine the implications of tightening global monetary policies, slower growth and trade, and diminishing forex buffer on India, in the context of rates, Indian rupee/U.S. dollar, and growth outlook. Accordingly, we calibrate our model portfolio.
The path of restrictive monetary tightening adopted by central banks in advanced economies and the narrowing global liquidity reflect the considerable drawdown in forex buffer in Asia by over 550 billion from the 2021 peak, mostly contributed by China (-$195 billion), and India (-$89 billion).
Significant further tightening by advanced economies could accentuate the transmission of tightening financial conditions into emerging markets.
Emerging Asia, particularly China and India, gained disproportionately from the fiscal and monetary stimulus’ in advanced economies, particularly in the U.S. and UK. Demand surge and supply bottlenecks created new export opportunities, with substantial surge also seen in forex reserves. But those episodic gains are now reversing.
While correction in global commodity prices is impacting price-led exports, higher consumption and crude prices are elevating imports, thereby widening the current account deficit, gross domestic product to 3.3% in FY23E, unmatched by capital lows. Thus, Reserve Bank of India will also be compelled to temper demand.
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