Mumbai: India and other emerging markets such as Indonesia, Brazil, Turkey and Argentina will continue monetary tightening in 2019, rating company Moody’s Investors Service has said.

“Rising global interest rates, tightening global liquidity conditions and elevated oil prices leave few emerging markets with any further capacity to ease," Moody’s said on Tuesday.

Monetary authorities in the euro area, the UK, Canada and South Korea will also gradually tighten policy conditions to ensure macroeconomic stability, the rating company said.

Advanced economies had either begun or were nearing normalization of monetary policy, though this could slow down if downside risks to growth materialized, it added. “We expect the (US) Federal Reserve to continue its gradual pace of monetary tightening during 2019, which, over time, will push up the US’s interest burden and weaken its debt affordability."

The Reserve Bank of India (RBI) in its October monetary policy highlighted similar issues regarding policy rate tightening. The central bank said that both global and domestic financial conditions had tightened, which might dampen investment activity. Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war, RBI added.

After two successive rate hikes, the RBI monetary policy committee (MPC) kept key policy rates unchanged in October, citing a benign inflation trajectory and downward revision to inflation projections, though the stance changed from neutral to “calibrated tightening". RBI has raised the repo rate by 50 basis points so far in 2018 and said rate cuts were off the table.

Bloomberg data shows that the Indian rupee has depreciated 12.55% against the dollar since the beginning of this year. Other currencies such as the Chilean peso and the Russian ruble weakened 9.45% and 12.64%, respectively, in the same period. The Angolan kwanza and the Argentine peso were the worst affected at 45.6% and 47.7%, respectively, data shows.

Moody’s also cautioned about the uncertainties surrounding economic and fiscal reforms because of the forthcoming elections in India, the election of Jair Bolsonaro in Brazil and a policy paralysis in Lebanon.

“The fracturing consensus in Europe, which will impede national and policy development across the euro area, is further illustrated by the problems facing Germany’s coalition government," it said.

The US economy would remain a key driver of global growth, but growth would slow by more than half a percentage point as the effects of 2018’s fiscal stimulus fade, it said. Similarly, in the euro area, growth will decline slowly towards potential.

“The UK economy is decelerating and faces further Brexit-related downside risks. In China (A1 stable), while we expect moderate policy easing to partly offset the impact of increased US tariffs, GDP (gross domestic product) growth will slow toward 6% in 2019."

However, the rating agency believes that growth prospects for emerging markets are mixed.

“India and Indonesia are likely to grow near trend despite external and domestic challenges. In contrast, Argentina, Brazil and South Africa face below-trend growth and we expect Turkey to be in sharp recession," it said.

Moody’s expects G-20 growth to peak in 2018 at 3.3% before slowing to 2.9% in 2019. For advanced economies in the G-20, Moody’s believes growth will slow to 1.9% in 2019 from 2.3% in 2018, a pattern mirrored in key economies, including the US and Germany.

“Slowing growth means that the window for global sovereigns to address long-standing credit challenges, including high levels of public and private debt, as well as longer-term trends related to ageing and inequality, is closing," Moody’s said.

It pointed out that high debt, falling growth and rising rates expose sovereigns to the risk of shocks and several emerging and frontier markets are particularly exposed to tightening global financial conditions and rising US trade protectionism.

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