The Indian Economy Needs A Dovish Raghuram Rajan
Ongoing economic reforms and de-bottlenecking of investments will of course add to our growth rate in coming quarters but this must be accompanied by a large fall in the cost of capital. Negative yields made up 16 percent of the JPMorgan Global Government Bond Index following massive bond buying programs by the ECB and the Bank of Japan—against this backdrop, I see no reason why Indian bond yields should not fall to 4-5 percent in two years. For this to happen, Raghuram Rajan must hit the interest rate easing button faster than most expect.
The Fed and the US Dollar—Rajan should not worry about a weakening INR
In the upcoming Federal Open Market Committee due next week, it is widely expected that the Fed will drop the word ‘’patience’’ with respect to monetary policy normalization. This should lead to another leg of a broad based greenback rally but my hunch is that the Fed wants to kill the Dollar rally by verbal intervention, at least in the medium term. The parabolic uptick in the US Dollar is hurting corporate offshore earnings and also hammering down the price of WTI crude which is adding to deflationary pressures.
The Fed should fear that removing ‘patience’ without an offsetting expression of concern on USD appreciation will lead to another round of USD buying that would itself make normalization difficult. There is a medium term top to the Dollar index at 100-105 in this column’s view and I see it making a dash to 90-95 first rather than 110.
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