The U.S. Federal Reserve has left interest rates unchanged for a third straight meeting, citing a moderation in economic growth in the world’s largest economy. The Federal Open Market Committee will next meet on June 14, and with Wednesday’s decision it has provided policymakers at the Reserve Bank of India with just a little more elbow room when they decide on monetary action at their June 7 sitting. The U.S. is the largest market for Indian exporters, and some of the economic indicators spotlighted by the Fed will help them gauge the strength of demand for their goods and services. These include a distinct softening of fixed investment by U.S. businesses, and slower growth in household spending despite strong job gains and ‘high’ consumer sentiment. With global trade sluggish and China’s economic reset still roiling sentiment in commodities worldwide, the data from the U.S. merit a close watch. Signs from corporate America in the form of earnings have also offered little cause for cheer in recent days, with a slew of technology majors, including Apple Inc., Google’s parent Alphabet Inc. and Microsoft Corp., reporting disappointing numbers. For its part, the FOMC asserted that it expects economic conditions to “evolve in a manner that will warrant only gradual increases” in the benchmark interest rate and reiterated that its policy stance remains accommodative. Interestingly, one of its 10 members cast a vote of dissent by recommending that the target range for the federal funds rate be raised by one quarter of a percentage point. But overall, just four months since the Fed initiated the process of normalising interest rates, triggering concerns about possible capital outflows from emerging markets including India, the tone and tenor of its policy communications suggest that interest rate increases are going to be fewer than expected before.
Meanwhile, the Bank of Japan has surprised Asian markets by not adding to its stimulus programme amid continuing signs that the world’s third largest economy is struggling to escape deflation. Prime Minister Shinzo Abe’s efforts to reinvigorate the Japanese economy through a combination of fiscal and monetary stimulus have had less than the desired impact, with the gross domestic product shrinking in the last quarter of 2015. The International Monetary Fund, which earlier this month pared its forecast for global growth, cited Japan as a key factor and cut its growth forecast for the country for 2016 and predicted a likely contraction for its economy in 2017. Clearly, from the perspective of striking a balance between supporting domestic growth and attracting adequate capital flows, RBI Governor Raghuram Rajan and his fellow policymakers still have their task cut out. While in its statement the Fed dropped for the first time this year a reference to “risks” in the context of the global economy, the RBI must use the next five weeks to gauge the strength of the headwinds and, if domestic factors too warrant, be ready to provide policy accommodation to help bolster India’s economic recovery.
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