India does not have to raise its policy rates in tandem with US rates: Adrian Mowat

If India’s current robust economic growth continues, then the country’s central bank need not raise the interest rates in tandem with the US Federal Reserve, according to Adrian Mowat.

Mowat, veteran equity strategist for emerging markets particularly India, was speaking with Moneycontrol’s N Mahalakshmi.

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When the Fed raises rates, it can make dollar more attractive than rupee. It can cause money to flow out of India, weaken the rupee and increase imported inflation. Currently, the interest-rate differential between dollar and rupee is at the lowest in over a decade.

Mowat said that the differential, between Fed’s policy rates and RBI’s policy rates, can go down further and that it does present a vulnerability for India. “If there is a macroeconomic shock for India, its flexibility will be less because the chance of the currency weakening will be higher,” he said.

But he added that, even with a smaller differential, India will continue to attract capital. Mowat said, “if we assume that the current relatively robust economic growth in India continues, then this will be a place that will attract capital In a world where we're concerned about G7 growth.”

G7 is a consortium of countries--UK, US, Japan, France, Germany, Canada and Italy—which have been classified as major advanced economies by the International Monetary Fund (IMF).

Mowat said that India has so far managed to avoid raising rate in tandem with the US.

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“If you think about India, on a global perspective, it is still fastest growing major economy. You do have inflation in India, but inflation is not significantly out with trend… so, India is a place that can run a modest current account deficit, and I think still attract equity capital,” he said.

“Also, it’s not an economy that is dependent on managing its savings deficits purely by offering a higher level of interest rates. So, I think there is a chance that the RBI rate hikes will lag that of the Fed’s. And if we're only talking about another 50 bps hike (from the Fed), that I don't think that is too big an issue (for India),” Mowat added.