India’s central bank governor has expressed concern over the growing indebtedness of regional trading partners and said he is alert to possible risks to his country’s economy from a global slowdown.
Shaktikanta Das, in an interview with the Financial Times, said he was optimistic about India’s growth and financial stability despite the deteriorating global economic outlook. The IMF expects that a third of the global economy will be hit by a recession this year, it said recently.
Analysts are forecasting India will be a bright spot, but the Reserve Bank of India governor said there was “no room for complacency”.
“Net-net, India is far better placed than almost any other country,” he said. “However, the global challenges are building,” he added, saying they “will have their impact and will have their impact on India.”
Speaking of India’s regional neighbors, Das said: “We are quite concerned about the debt crisis in all these countries because we have many trade relationships with these countries. This is a topic that we are following with great interest.”
That declined to specify which countries he meant, but Sri Lanka last year became Asia’s first country to default in decades. Meanwhile, Pakistan, India’s nuclear-armed western neighbor and traditional enemy, has shrunk to $5.6 billion in foreign exchange reserves, about a month’s worth of imports.
Bangladesh’s export-led economy has been hit by lower demand, rising fuel prices and power outages, prompting the government to turn to the IMF for help last year.
Regional power India, on the other hand, was one of the fastest growing major economies in the world last year.
This attributed India’s resilience partly to the Narendra Modi government’s “calibrated, prudent” fiscal response to the Covid-19 pandemic and partly to the RBI’s monetary policy response, which was time-limited and sector-targeted. India’s sizeable foreign exchange reserves have boosted international investor confidence, he said.
India’s relatively conservative approach to Covid-19 stimulus spending has helped keep inflation under control, Das said. Although the RBI forecasts India’s inflation for the current fiscal year at 6.7 percent – above the RBI’s target 4-6 percent band – it is lower than many other leading economies.
Many economists expect New Delhi to increase spending in next month’s annual budget ahead of the 2024 general election. But Das said he had “no reason to doubt the government’s commitment to containing its budget deficit.”
India’s foreign exchange reserves, which peaked at $642 billion in 2021, have fallen to about $563 billion after spending to stabilize the rupee and being revalued due to the stronger dollar.
Das described this as a “very comfortable level” equivalent to nine months of India’s projected imports and 92 percent of its external debt.
He dismissed the idea of India “burning” reserves in 2022.
“You buy an umbrella to use when it rains,” he said. “You can’t leave your umbrella in the closet and say it’s going to spoil.”
Das denied that the central bank’s currency interventions were in defense of the rupee and argued that he was aiming for an orderly devaluation. “We don’t have a specific exchange rate in mind,” he said.
Since Russia invaded Ukraine, India has felt pressure from higher food and energy prices, leading it to move away from traditional oil suppliers towards discounted Russian crude, as well as New Delhi’s efforts to promote the rupee in the US accelerated international trade.
Das said the bank has now approved rupee accounts for six to seven countries and is refusing to name them, which would allow them to conduct business in India’s local currency rather than dollars, the typical international exchange currency.
“They will be able to save dollars — particularly countries in the South Asian region — and also outside of the South Asian region for which dollar-denominated foreign exchange reserves are a concern,” Das said.
The RBI governor has been scathing about cryptocurrencies, arguing that RBI helped protect investors from the sector’s recent collapse by discouraging the government from — and thereby legitimizing — regulating digital assets.
“That’s exactly what we said: that sooner or later this is going to collapse because it has absolutely no underlying value,” Das said.
“It’s a purely speculative product,” he added. “Someone also has to say what common good it serves.”
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