Tuesday, October 4, 2022

Recession News: What if US economy goes into recession? How it may impact India | India Business News

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Factdarshanpedia Desk is a team of various journalists, who work together and publish best-researched news stories on Factdarshanpedia

NEW DELHI: The US Federal Reserve is expected to lift interest rates by three-quarters of a percentage point for a third straight time on Wednesday and signal how much further and how fast borrowing costs may need to rise to tame a potentially corrosive outbreak of inflation.
While investors largely expect the Fed to lift its policy rate by 75 basis points to the 3.00%-3.25% range, markets could be unsettled by the updated quarterly economic projections that will be released along with the policy statement.
The Wall Street is worried that the rate hikes could go too far in slowing economic growth and push the economy into a recession. Those concerns have been heightened by data showing that the US economy is already slowing and by companies warning about the impact of inflation and supply chain problems to their operations.
Apart from the US, economic contraction was witnessed in Britain as well. Even the Eurozone is still not out of the pandemic woods, and China has just stalled in its track in Q1, weighed down by successive lockdowns of its large cities.
Both US and China are currently battling a slowdown. In such a scenario, it won’t be wrong to say that when two of the biggest economies in the world are facing such economic downturn, fears of recession are more than valid. And, if that happens, spillover effects are sure to affect India as well.
Where does India stand
In the first quarter ended June 30, 2022, India reported a 13.5% jump in its gross domestic product (GDP). Even though the numbers seem to be good enough on the face of it, but it is 2.7 percentage points lower than what Reserve Bank of India (RBI) projected.

Hence, the GDP numbers turned out to be a disappointment for many. There was expectation of a bigger bounce back from the first quarter of last year when economic activity was crippled by the delta wave of Covid-19.
If we see, the numbers show fastest growth in a year. Last time India’s GDP had shown a massive jump was in Q1 of FY22 when it recorded a surge of 20.1%. However, there has in fact been a slowdown in pace of growth momentum, which points to GDP decelerating further in the quarters to come.
GDP growth may slow
A report by Nirmal Bang securities suggests that India is not immune to a US recession and domestic growth has slowed by approximately 1.5-2.5% even in normal Fed-led recessions.

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“Assuming a mild US recession and GDP growth of 7.5% in FY23 in our base case, we believe that GDP growth could slow to 6% in FY24 (revised down from 7% earlier),” the report added.
Citing examples from previous data, it pointed out that even a shallow, short-lived recession in the US has the potential to bring down GDP.
However, it goes on to project that relatively stable domestic fundamentals in terms of strong financial sector and non- financial sector balance sheets, high foreign exchange reserve and some amount of countercyclical fiscal policy ahead of elections in FY24 will limit the growth slowdown to 1.5%.
The report further slashed economic growth estimate for FY24 from 7% to 6%, assuming that the US suffers a mild recession.
“In a worst case scenario, growth could slow to 5% or below,” it added.

What will be the probable impact
* Merchandise exports may fall: With US being one of India’s major trading partners, its market share in India’s merchandise exports stood at 18.1% in FY22.
As a result, India is vulnerable to a US recession, the Nirmal Bang report said. Software exports are expected to be worst hit in India.

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* Interest rate trajectory: Historical data cited by the Nirmal Bang report showed that past periods of recession or significant slowdown in growth in the US have been usually countered by rate cuts from the Federal Reserve. Contrary to this, the Fed has been on a rate hike spree since March 2022 in a bid to tame inflation that has jumped to 40-year high in the world’s biggest economy.

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Bloomberg5 (2)

Not just US, inflation pressure has been felt by almost all major economies of the world ever since two significant trade routes led by Russia and Ukraine had to be shut in wake of the war. As a result, prices of key commodities like crude oil surged to record highs making countries shed significantly more for a barrel.
Experts believe that continuous rate hikes by central banks have contributed a great deal to the slowdown in growth. Like India, central banks all over the world faced twin challenges of whether to opt for growth or curb inflation, and majority of them went for the latter.
The Reserve Bank of India (RBI) also acted in tandem and hiked benchmark lending rates in order to bring down inflation. From March to August, RBI has hiked interest rates by 140 basis points to pre-pandemic level of 5.4%. However, the impact on inflation has not been felt as yet. Therefore, it is expected that the Reserve Bank will opt for more rate hikes in its upcoming monetary policy committee (MPC) meetings.

RBI & the Fed
The report further noted that India’s rate hike cycle has never moved in the opposite direction to that of the Fed. However, there have been periods of extended pauses in the 1970s and 1980s when the Fed had raised as well as cut rates.
Similarly, when the Fed cut rates in early 1990s, the RBI maintained a pause. While, during 2010-2014, the RBI raised rates even as the Fed remained on pause.
“Therefore, there is a likelihood that the RBI could remain on an extended pause or not match rate cuts (if any) by the Fed in the event of a US recession if India’s growth remains relatively resilient,” the report said.
India during past US recessions
The chart below shows how India performed amidst past few phases of US recession. India’s fiscal deficit has remained high on counter-cyclical policy support while inflation may be relatively contained. At present India’s inflation level is at 6.2%, much lower than 9.1% in FY09.

Current account deficit (CAD), which is 0.9% of GDP at present, was much higher at (-)2.4%. The report said CAD may be contained while the rupee may be flat or trade with a slight depreciation bias.
“In our view, the worst of FPI outflows from Indian equities may be largely over. Hence, FPI flows are likely to resume gradually, which may limit the depreciation pressure on rupee,” the report added.
(With inputs from agencies)

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