Waiting for Chinese (stimulus) takeaway

Beijing’s unprecedented stimulus for financial markets has brought back the China bulls on Wall Street. Following close on the heels of the US Federal Reserve lowering interest rates, with expectations of more big cuts soon, investors are positioning themselves for an equities rally. The US does not seem headed for a hard landing yet. And with China getting serious about stimulating the economy out of its slow post-Covid recovery, the markets are now decisively risk-on. As more monetary easing unfolds in the US, and China steps up fiscal support to recovery, capital flow into emerging economies should swell. A big part will be headed for East Asia. But some of it will wash up on Indian shores as well.

A resurgent Chinese economy is a mixed blessing for India. The effect on global growth will be a positive for India’s export plans. The higher demand on resources as Chinese factories come on stream will, however, have an inflationary effect on commodities. India has managed to tame its current account deficit partly because of the Chinese slump and its effect on the commodities cycle. This headroom may shrink now. Policy will also need to be adapted to keep the rupee at levels that make Indian exports competitive.

The immediate question for investors is when will RBI wield the scythe and begin its rate-cutting cycle. The central bank has kept the growth sacrifice relatively low during its battle with inflation, which may not be over yet. India’s monetary policy has some leeway in that sense. However, it cannot be oblivious to monetary easing in the world’s two biggest economies. RBI would need to be reassured that inflation makes its last-mile journey in an orderly fashion. On its part, the central government will not want to squander fiscal gains made during its post-pandemic recovery. This may be the prudent course, with fiscal stimulus unlikely to wind down in the US and China anytime soon.