Managing BoP Stress Needs Monetary Policy Backing

ANZ argues that India must deploy monetary policy rate hikes to address persistent balance of payment stress and thinning macro buffers. They forecast pre-emptive hikes in June and August to curb inflationary risks from currency depreciation.

Key Takeaways

• 1.India's monetary policy must support the balance of payment (BoP) response through pre-emptive rate hikes to signal financial stability and anchor expectations.
• 2.The current BoP stress is persistent rather than episodic, driven by structural global factors like tight financial conditions, a tech-driven growth cycle, and high oil prices.
• 3.Macro buffers including fiscal space and FX reserves are thinning, with the central government facing fiscal slippage risks and reserve adequacy approaching 2013-14 levels.

Table of Contents

• India: managing BoP stress needs monetary policy backing
• BoP stress is persistent, not episodic
• Markets are volatile as macro buffers are thinning
• Managing the BoP stress with monetary policy backing
• Three pertinent questions
• Why not let the exchange rate alone absorb the BoP shock?
• Bottom line
• Important Notice

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