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- The lowering of the US' sovereign rating to AA+ from AAA on August 5, was a jolt to the standing of the economic superpower.
- The political squabble amidst the slowing pace of recovery in US has made debt consolidation difficult and triggered the downgrade.
- Unlike the deterioration in the case of US, the debt situation in India has improved in the last few years and stands at 65 per cent of GDP in 2010-11.
- MARKET RESPONSE
- Except for the equity and forex markets, the condition in the money market has remained stable, and some softening was observed in the g-sec yields
- The RBI's move to calm the markets by assuring adequate rupee and forex liquidity helped smoothen out the situation.
- markets may respond to sentiment in the immediate term but it is fundamentals that eventually govern investor confidence and flow of resources in the medium term.
- TRADE AND GROWTH
- The Indian economy is affected by global events through three channels — trade, finance and the confidence channel.
- Indian exports in the first six months have been quite resilient. This has been possible on account of the change in the composition and the direction of India's trade.
- Notwithstanding the lower dependence on the US and the EU, exports will be affected to some extent because of a deceleration in global trade growth. As per WTO estimates, the global trade volume is set to grow by 6.5 per cent in 2011, compared with 14.5 per cent in 2010
- As far as the finance channel is considered, India has seen robust FDI flows in the first half of 2011, though FII flows have been rather weak.
- During the previous global recession, the Indian economy posted a respectable growth of 6.9 per cent in 2008-09. This was possible because growth is fuelled by strong domestic demand. The forces driving domestic demand remain intact in 2011-12. In fact, the central bank has been trying hard to contain domestic demand for quite some time by raising interest rates 11 times in the past 18 months.
- COMMODITY PRICES
- Brent Crude had fallen to $99.68 on August 8, down from a peak of above $127 in April 2011. On the one hand, if commodity prices soften further or are maintained around the present levels because of growth deceleration in advanced economies, a potential source of inflation in the Indian context might ease.
- This would ease the pressure on RBI to raise rates further to control the demand side of inflation. On the other, weak export growth will have a dampening effect on overall GDP growth. Thus, we could have a combination of lower growth and moderate inflation by the end of 2011-12.
