US monetary policy, dollar biggest risks to emerging economies in 2023: RBI

The Reserve Bank of India (RBI) in its January bulletin has said macroeconomic stability is getting bolstered with inflation being brought into the tolerance band and lead indicators show the current account deficit is on course to narrow through the rest of 2022 and 2023.

The RBI says for emerging and developing economies, the biggest risks in 2023 are US monetary policy and the US dollar. "Some of them have shown remarkable resilience during 2022 in coping with global spillovers from these sources, and in calibrating monetary policy to domestic growth-stability trade-offs in a period of high inflation levels and volatility."

Emerging markets are appearing more resilient than in the year gone by, but their biggest risks in 2023 stem from US monetary policy and the US dollar, the report adds. In India, the central bank thinks, the softening of commodity prices and other costs amid strong revenues appears to have boosted corporate performance. 

According to RBI Governor Shaktikanta Das, the South Asian region’s heavy dependence on imported fossil fuels has made it vulnerable to imported fuel inflation.

For the year 2023, the RBI says the year has begun with predictions of a slowdown in global growth like the painful contractions of 2009 and 2020, imposed by the financial crisis and the Covid pandemic. 

The RBI says though inflation was the dominant economic and financial issue of 2022, the recession will overthrow it and take the driver’s seat of the global discourse in 2023. Global growth may turn out to be 2% or lower, while inflation in the advanced world may average above 4% and 8% among emerging and developing economies, it says.

Financial markets, however, are contesting this view on the global outlook for 2023 as they take cues from the moderation in inflation; the ebbing of commodity prices and supply chain pressures; and early signs of slowing activity and trade. "Bond markets are shrugging off central bank guidance and eyeing lower terminal rates than implied in the latter’s hawkishness - easing yields and a surge of issuances marks the onset of the new year. Equity markets also seem to be still pricing in a soft landing as fund managers girdle up to recoup the losses of 2022." 

The RBI says the US dollar is retreating from 20-year highs and many emerging market currencies are reversing the losses of December 2022. It forecasts that on the flip side, the year 2023 is likely to be a year of low capital expenditure worldwide, with businesses deterred by the uncertainties surrounding geopolitical dynamics and green transition. "They will have to defend against still-elevated costs and increased expenditures on inventories and receivables to the detriment of capital spending."

Notably, the IMF has said one-third of the world will be in recession in 2023. In its latest Global Economic Prospects released on January 10, 2023, the World Bank also pointed to a prolonged slowdown in the global economy, with growth pegged at 2.2% in 2023 -- the third lowest in three decades. For advanced economies, growth has been revised downwards by 170 basis points relative to June 2022 projections to 0.5%, whereas for emerging market economies, it has been lowered by 80 basis points to 3.4%.