India is in a better position to navigate financial turbulence due to Fed monetary tightening compared to its situation during the “taper tantrum” episode after the 2008-2009 global financial crisis even though it remains vulnerable, the United Nations said in its "World Economic Situation and Prospects" report.
“This is due to a stronger external position and measures to minimize risks to bank balance sheets. In the medium-term, scarring effects from higher public and private debt or permanent impacts on labour markets could reduce potential growth and prospects for poverty reduction (in South Asia),” the report said.
The report produced by the United Nations Department of Economic and Social Affairs (UNDESA) said India’s monetary policies remain accommodative with interest rates close to record lows and liquidity measures still in place in most economies. “Yet the monetary cycle is gradually shifting as global financial conditions tighten and the recovery gains steam. The Reserve Bank of India has begun to taper liquidity by increasing the volume of reverse repo operations and the cash reserve ratio; it is expected to raise interest rates throughout 2022,” it said.
Accelerated global monetary tightening could increase volatility, trigger capital outflows and disrupt credit growth, especially in countries with elevated debt, large financing needs and high levels of foreign-currency-denominated debt, the report said. “Significant financial distress could emerge as highly leveraged firms face greater refinancing costs, particularly in sectors hit harder by lockdowns, even more so if the removal of forbearance measures uncovers a large deterioration in balance sheets,” it added.