Prepare projects projects projects

Prepare projects projects projects

US Federal Reserve chairman Jerome Powell has announced a new monetary policy stance that would keep interest rates low and push capital into emerging markets like India. India must prepare for large inflows of capital and attendant uncertainties of exchange and interest rates. The most sensible response would be to work out detailed infrastructure projects that can absorb the global capital that comes gushing in.

The Fed will target an average inflation rate of 2%, Powell said. What this means is that policy rates will not be tightened as soon as inflation begins to perk up. Prices have remained stagnant for long periods, which means that, to achieve an average of 2% of inflation over a period, inflation will have to stay above 2% for some time before monetary policy begins to tighten. Rates will stay soft for an extended period, in other words. Unless there is crisis and panic, this is a recipe for American funds to leave the home market in search of more decent returns.

A fast-growing economy like India would be an inevitable destination. When that capital floods in, two things happen. One, it sets up the risk of sudden withdrawal as well, which must be hedged against.

Two, it would put upward pressure on the rupee, to neutralise which to some extent at least, the Reserve Bank of India (RBI) would be forced to buy up a part of the incoming dollars. That would inject additional liquidity into the system that could lead to inflation, so RBI would mop up a good part of it through sale of bonds. The plentiful supply of bonds would lower their price, pushing up yields. To protect Indian exporters from an overvalued rupee, RBI would impose higher interest rates over the rest of the economy.

The best way out is to have a rack of projects ready, complete with the needed clearances, that could absorb the additional foreign capital inflows. Urbanising India has plenty of scope to build lots of high-quality infrastructure. The point is to create structures that would put incoming capital to efficient use — corporate, accounting and governance spanning the environment and social impact.