‘RBI needs to be watchful of US Fed’s action’

NEW DELHI: S&P Global Ratings global chief economist Paul Gruenwald on Friday said the RBI needs to be watchful of the US Federal Reserve’s action to enable them to respond to the fast-changing policy landscape.
“I think the point is that India and other emerging markets have to be cognisant of what the US Fed is doing and they cannot ignore the Fed. The US ha s this wonderful position where they can make monetary policy and not worry too much about the rest of the world but all of the emerging markets, including India, have to take into account what the Fed’s doing,” said Gruenwald.
“So there is a risk that if the Fed has to do more to get inflation under control in the US and raise rates more, that might kind of push rates higher across the entire emerging markets, including India,” said Gruenwald, adding that it would put pressure on emerging markets to do more.
On the issue of whether controlling inflation should not be left to monetary policy alone, Gruenwald agreed with the view that both monetary and fiscal policies should work in tandem.
“It’s always better what we call the policy mix is well aligned. If an economy is overheating and there’s too much demand pressure, ideally you would want the government to be reducing demand, and also the monetary authority to be raising rates and tighten financial conditions, and those two policies would work together to slow demand,” said Gruenwald.
“In a perfect world, monetary and fiscal policy should be working together. What is complicating things in the past few years is the supply-side inflation drivers, from supply chain disruptions to energy and food prices. Central banks can’t really control those,” said Gruenwald. He said the tricky part now for central banks is to try to gauge how much of the inflation is coming from domestic policies and how much is coming from the rest of the world.
“There are a lot of conflicting signals right now, looks like supply chain pressures are easing and continue to ease, it also looks like, for now, energy prices may be flat, so inflation fro m that source is moderating. But the core part is really heating up. It’s a tricky balancing act for central banks to tame inflation and put the economy on a more sustainable growth path,” said Gruenwald, adding that the Covid-19 shock and supply-chain disruptions had made it more difficult for central banks.

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