![]() Consumer discretionary demand is likely to moderate due to higher interest rates and increased uncertainty, even as lower inflation boosts real incomes. Uncertainty is likely to further delay private capital expenditure. Recessions in the US and Europe mean that India’s export slowdown has further to run. However, we believe India’s macro-economic outlook is now at a crossroad, and weaker-than-expected growth and lower inflation have become more likely. India also has enough foreign exchange (FX) reserves to manage any capital account outflows. ![]() Direct spillovers from the Western banking turmoil are limited and, after a decade of deleveraging, both financial and corporate sector balance sheets are stronger. Hard landings are eventually disinflationary, so the policy trade-off between inflation and financial stability should become less stark.įor India, this means weaker growth and lower inflation: Under our baseline scenario, India appears well placed on financial stability. However, if the banking turmoil becomes a full blown financial crisis (not our base case), then a hard landing is inevitable, because non-linear effects would kick in via falling asset prices, falling confidence, job losses, reduced demand and so on. In its effort to quash inflation, the Fed is likely to pause for the rest of this year. Further policy tightening in the US is unlikely, as tight credit conditions have already done that job. We currently expect a three-quarter long but mild recession in both the US (starting in the third quarter) and euro area (underway). With high uncertainty and an elevated cost of capital, firms could delay capital expenditure plans and stop hoarding labour, while consumers may increase precautionary savings. And third, recent shocks may get transmitted further through the confidence channel. Second, the banking turmoil is likely to further weaken growth through the bank lending channel, due to tighter lending standards, which we would note were already tightening before the recent turmoil. In either scenario, weaker global growth is likely: Even in our baseline case of no financial crisis, we still expect recessions in both the US and Europe.įirst, monetary policy works with lags, and the full impact of the synchronized policy tightening of the last year on final demand has yet to fully materialize. However, uncertainty is high and this remains an evolving situation. ![]() In a higher-rate and slower-growth regime, more financial tremors are inevitable, and a liquidity crisis could morph into a credit crisis.Īt this stage, we believe policymakers will succeed in addressing the liquidity problem and in restoring confidence. ![]() One could argue that the last decade-plus of low rate/easy monetary policies has pushed investors into high-risk/high-return assets, increased financial leverage and shifted risk to non-bank financial institutions that are opaque and harder to regulate. Since last year, we have seen tremors in the cryptocurrency space, meme stocks, the UK pension liability-driven investing crisis and now in US and European banks. As seen during the GFC, financial shocks come in waves. In the bad scenario, this snowballs into a financial crisis. The existing backstop restores confidence, deposit outflows stabilize after some time and further bank runs are avoided. This prevents other smaller US banks from having to sell their assets at a loss. How the banking turmoil may progress-good versus bad scenario: In the good scenario (our baseline case), the US Federal Reserve manages to address banks’ liquidity needs via its new bank term-funding programme and its regular discount window.
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