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Weak dollar, rising global interest rates pose threat(Ecomonic Times, The (India) (KRT) Via Thomson Dialog NewsEdge) Apr. 19--Is the global economy on the brink of a hard landing, and, if so, is the Indian growth story going to come to a halt? Increasing global imbalances have begun to worry policymakers worldwide. At the heart of the imbalance lies the bulging and clearly unsustainable current account deficit of the United States. If the US economy crash-lands, it has the capacity to trigger a global recession by pushing up inflation and interest rates, weakening the US dollar and adversely affecting housing and equity markets. A rise in global interest rates and a weakening of the dollar are likely to impact India's overall investment and export environment. While external risks arising from a continuing increase in oil prices have been well-debated, unabated global imbalances -- with huge US current account deficits on the one hand and an environment of hardening interest rates as well as a liquidity glut on the other -- have come into greater focus in recent months. According to RBI, in its annual policy statement for '06-07, "current account imbalances seem set to widen over the next two years... there is a growing consensus that the size of the imbalances has exceeded the capacity of markets to bring about an adjustment and that there has to be concerted policy intervention of some form to enable a soft landing". Moreover, the central bank points out that a general declining trend in global investment rates has meant that such imbalances are easily financed. India, without doubt, will be affected due to its growing linkages with the world economy. While on the one hand, this has led to increasing merchandise exports, software exports and a pile up of foreign exchange reserves, it has also made the economy more vulnerable to external developments. Not only is the dollar's weakening a concern for India, a hardening of global interest rates may put increasing pressure on Indian rates, negatively impacting the investment environment. A tightening monetary policy is already under way in a number of developed and developing nations. The current account deficit in the US corresponds to a surplus in the current account in the rest of the world. In a way, increased consumption in the US is being financed by a rising savings rate in other countries, which flows into the US. If, at any given point, countries choose not to invest in US securities, it would be enough to trigger global macroeconomic imbalances. |