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India may not be severely impacted even if US defaults, RBI closely monitoring situation

All eyes on RBI as threats of US debt default rise

The Reserve Bank of India (RBI) is closely monitoring the developments in the US, which could default in about a fortnight if the debt ceiling is not increased immediately. The impact would not only be felt in the US but the world over, though the exact implications are yet to be ascertained. However, sources told India Narrative that the country’s financial services sector continues to be fundamentally strong and the implications may not be as severe. Besides, the RBI continues to have sufficient liquidity to absorb the shock, if at all the situation demands, they added.

The easing of retail inflation in April to 4.7 per cent — the lowest since October 2021– has also given RBI the necessary room to fix its gaze once again on the country’s economic growth. According to Motilal Oswal Financial Services projections inflation is expected to ease toward 4.5 per cent in coming months and 4 per cent by September-October.

Economic growth concerns have, however, risen not only with the uncertainty in the US but also threats of an emerging El Nino situation. “The government and the RBI need to work in sync to ensure that India’s economic dynamics are not dented significantly,” a policy analyst said. “While the situation is uncertain and a developing one, the RBI is assessing the developments and is also in the process of chalking up a plan to handle the economy in case the default happens,” he said, adding that India’s macroeconomic indicators are stable.

Even as the deadline for the expansion of the debt ceiling inches closer, there has been no consensus in Washington.

“The Indian stock market is likely to be impacted by the uncertainty surrounding the US debt ceiling and the possibility of a default by the US government. The situation could trigger a global market sentiment that could harm both equity and foreign exchange markets in India,” SK Hozefa, CEO, Tradeplus Online said.

The U.S. government has run a deficit averaging nearly $1 trillion every year since 2001, said the Council on Foreign Relations. The US has also suspended the debt limit seven times since 2013.

The US, which has resorted to raising the debt ceiling more than 78 times since 1960, last increased the limit in late 2021 to $31.4 trillion.

Also read: RBI pauses hike in key policy rate bringing cheer to industry