RBI says fellow EMEs are in trouble and recovery is not strong in India

The RBI’s third bimonthly monetary policy statement has kept the policy rate unchanged. Despite the policy statement being a nonevent, the central bank has raised certain concerns about the future ahead for the world economy and India.

In its policy statement, brought by Governor Raghuram Rajan, the RBI observes that the current economic scenario is not good for the EMEs. The continuing turmoil in the Chinese stock market has global dimensions.  “Despite aggressive policy stimuli, the Chinese economy is slowing on macroeconomic rebalancing, sizable stock market corrections, a cooling property market and excess capacity in several manufacturing industries.”

The Chinese market has continued its downward scoop as the leading Shanghai index fell by 1.1 per cent on Monday.

Similarly, the RBI observes that commodity price fall has badly affected the two other fellow runners- Russia and Brazil. “Recessionary conditions persist in both Russia and Brazil, with downside risks from commodity prices and geopolitical developments casting a shadow on the outlook, including for other EMEs.”

The Central bank has noted that investors have reduced EME holdings in the last few months. But at the same time a generalized capital flight from Emerging Market is not visible.

In the medium term, US Fed’s policy stance will guide investors in the EMEs.

For India, the RBI has observed that investment conditions and economic recovery are dimming compared to the previous quarter. “Although overall business confidence is positive, the level of optimism was a shade lower in April-June than in the preceding quarter. Investment, as measured by new projects, is still weak, primarily because of still-low capacity utilization.”