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The Reserve Bank Governor Shaktikanta Das has said despite the latest headwinds arising from the Jackson Hole summit leading to extreme volatility, the country’s banking system and financial markets are strong enough to withstand such pressures. Taking the markets by surprise, US Fed chair Jerome Powell had told the annual Jackson Hole summit of central bankers last week that he would have to keep raising federal fund rates to tame inflation, which remains the biggest challenge to the world’s largest economy. He also warned of the pains that such monetary policy actions would create on growth and jobs. In the previous policy meeting, Powell had sort of sounded dovish on interest rates.

Das said the recent commentary from the US Fed at Jackson Hole on the future trajectory of US monetary policy has created substantial volatility in global financial markets, with large spillovers and knock-on effects on emerging markets. And the difficulty gets further compounded in an environment of high uncertainty as such forward guidance may even have destabilising effects on financial markets, especially if the subsequent policy actions are at variance with earlier pronouncements.

He said ‘the health of our banking system is sound. It’s well capitalised and well provisioned, with improved asset quality. This constitutes a key pillar of our financial stability and is expected to provide positive spillovers for the financial markets’. Noting that markets often tend to overreact to new information from central banks and other regulators, amplifying volatility, he said in times like now, when geopolitical tension and synchronised monetary policy tightening come together, overshooting often precedes subsequent realignment with underlying fundamentals.

Listing out the strengths of the economy and financial markets, Das said the India’s economy still is one of the fastest growing major economies, while other major economies are staring at recession or considerable growth moderation. It can be noted that while the US and Britain contracted in Q1, the Eurozone is still not out of the Pandemic woods, and China has just stalled in its track in Q1, weighed down by successive lockdowns of its large cities. He said such growth differential provides confidence to investors, which is amply reflected in surging portfolio inflows since July. Inflows in August alone at $7.5 billion are more than 16 times the net inflows in July. But such large inflows came in after foreign funds remained in the exit mode for the first seven months of the year, pulling out as much as over $29 billion.