The US Federal Reserve has, for now, refrained from raising its policy interest rates from the current targeted range of zero to 0.25 per cent. This, even with the unemployment rate, at 5.5 per cent in February, falling to its lowest since May 2008 and the Fed admitting that “labour market conditions have improved further with strong job gains”. Till recently, the central bank had indicated that an unemployment range of 5.2 to 5.5 per cent is the point where inflationary pressures could well start building up, thereby necessitating a reversal of its current ultra-low interest rate policy. But on Wednesday, it decided not to initiate this process of normalisation “for some time”, citing the fact that annual consumer inflation — at minus 0.1 per cent overall and 1.6 per cent excluding food and energy — is still below its long term objective of 2 per cent. But more importantly, the Fed does not seem confident yet about growth continuing to hold up once the steroids from accommodative monetary policy are withdrawn.
The contrast with India cannot be sharper here. Unlike the RBI, which is still dithering over interest rate cuts as it remains unsure about whether inflation is firmly on a downward path, for the US Fed — or even the central banks in Europe and Japan — the dilemma is over inflation hovering at levels so dangerously low as to make any raising of rates no less risky a proposition. The Fed has, in fact, now come out with a new unemployment range of 5 to 5.2 per cent, at which inflation could start edging up enough to make it “reasonably confident” of increasing interest rates. For India and other emerging economies, this is, of course, good news, given the past experience with “taper tantrums”. The last time around, in mid-2013, when the Fed first hinted at winding down its extraordinary monthly purchases of long-term treasury and mortgage-backed securities, India was particularly impacted by the sudden reversal of capital flow. With a current account deficit (CAD) that crossed $ 88 billion in 2012-13, the rupee became vulnerable to speculative attacks and plunged to lows of 68.8-to-the-dollar in August 2013.
Things have, no doubt, improved significantly since then. The CAD in 2014-15 may well be contained within $ 25 billion while official foreign exchange reserves have soared from $ 275 billion to $ 338 billion between August 2013 and now. IMF chief Christine Lagarde has called India a “bright spot” on a cloudy global horizon. If the government does enough to spur growth and revive investments, India can actually benefit from global capital inflows rather than outflows this time.