According to analysts at Rabobank, US trade and monetary policy will have a substantial effect on the Indian economy and in a global trade war, India could fall victim to adverse trade policies of the US and/or China.
“To analyse the effects on the Indian economy, we look into three possible trade war scenario’s where (i) China targets Indian exports, (ii) the US targets Indian exports and (iii) India retaliates against the US.”
“Our calculations show that India will lose most in scenario iii, namely 2.3% of missed GDP growth by 2022. Mainly, this is because the tariffs will reduce exports and cause (imported) inflation, which will hurt Indian purchasing power and investments.”
“Besides a possible trade war, a faster than expected tightening of US monetary policy will hurt India, namely via capital outflows. We estimate a model of Indian capital flows to quantify this effect and find that India’s capital flows fall substantially and result in India losing USD 22bn in missed capital inflows up to 2022. Our model also indicates that in case political risk rises in India and the INR depreciates sharply, missed capital flows will amount to USD 32bn by 2022.”
“In both cases, India will face a shortage of capital since capital flows will not cover its finance requirements. The consequence will be further downward pressure on INR and possibly higher interest rates if India uses its foreign reserves to plug the difference between its finance requirements and capital flows.”
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