Cross-border transmission of economic shocks from altering policy stance in major advanced economies emerge as a key challenge for EME's: RBI Bulletin

The Reserve Bank of India highlighted in its February bulletin that cross-border transmission of economic shocks arising from changes in the macroeconomic policy stance in major advanced economies has emerged as a key challenge for emerging market economies in today's world with complex trade and financial linkages. In line with international evidence, changes in the monetary policy stance of the US Federal Reserve tend to impact the Indian economy, altering domestic output and inflation, the bulletin stated. Changes in the US monetary policy worked like a cost-push shock in the pre-2008 period, consistent with the exchange rate channel of global spillovers. In the post-2008 period, however, the transmission of US monetary policy shocks has been mainly through the financial channel, i.e., by altering the financial conditions, thereby impacting growth and inflation in India. Heightened uncertainty around the stance and actions of the US Federal Reserve is estimated to reduce aggregate demand in the Indian economy.

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