Noted economist Nouriel Roubini thinks that the United States banking crisis is not over and inflation is likely to continue in developed markets.
Speaking to CNBC-TV18 on April 11, Roubini spoke on inflation and deflation concerns and where to invest in a stagflation scenario — recommending inflation index bonds and gold as investment options; and spoke about his outlook on India as a rising economy and big beneficiary of friend-shoring.
Friend-shoring is when countries or governments manufacture and/ or source from countries that are their geopolitical allies.
US Banking Crisis
Roubini is of the opinion that the US banking crisis is not over. He said: “I see more financial institutions in trouble. The recent problems of US banks have come from duration risk. We are going to go from market risk to credit risk in US; and as credit crunch increases, there will be a recession in the US. Then, once there is a recession in US, there will be more non-performing loans (NPLs), and more defaults.”
He also noted that the “tight” labour market implies that wage inflation is “still too high in the US”.
Also Read | What Roubini and Acharya have got wrong about India’s industrial policy and growth of conglomerates
The Fed & the economy
The economist believes that the US Federal Reserve (Fed) has to increase interest rates even more to achieve its 2 percent inflation target. He added that if the Fed raises rates, “there can be a recession and financial instability in the US.”
He was also of the opinion that there is a contradiction between achieving price stability, maintaining growth and financial stability. “If the Fed blinks, then there will be a de-anchoring of inflation expectation in US,” he added.
On the rate decision, Roubini thinks that the central bank will pause on cuts and hikes – “like most major central banks”. He added that the consequences of going back to 2 percent inflation will be “economic and financial instability in the US”; and that “we will have a repeat of the 1970s when inflation got out of control”.
Also See | US banking crisis: What big global voices say about risk going ahead? Market Minutes
Emerging markets
Roubini was emphatic about distinguishing between credits in emerging markets, adding that “India among emerging markets is certainly a positive one.” He also however noted that while India's fiscal policy “could be better, it is okay”.
“India’s potential growth run of 7 percent, may be higher with more economic reform. India is going to be a rising power in the next few years with additional economic reforms. I see India is closer to the West and to the Dollar, than the Yuan,” he added.
Also Read | Noted economist Nouriel Roubini doesn't see weaker rupee as a challenge for India
India and a few other emerging markets might also be a good place to invest in both fixed income and equities, Roubini said.
Watch the full interview here
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