The Federal Open Market Committee has raised the benchmark interest rates by twenty-five basis points in the United States of America ('USA') a few hours back. We take pride in being the first to bring to you an analysis of how this development will impact businesses in India. Notably, this is the 11th increase that we have seen since early 2022, which has led to the current interest rate reaching its highest level in USA in 22 years.

Our most recent survey on the impact of what is being referred to as ‘the most anticipated recession’ in the history of USA, has revealed that waves of the same have reached the shores of India. Nearly, 61% of the respondents of this survey have confirmed that their organizations have been impacted by this looming threat over the last quarter. However, the silver lining is that 70% of these respondents believe that this impact has been moderate, while for the remainder the negative impact on their organizations has been more profound.

Which brings us to an analysis of the following three pertinent questions.

• Is the threat of the impending recession in USA staring hard at India?
• What is the extent of the impact of risks relating to the same on Indian businesses? 
• Do the traditional indicators of a recession apply to USA’s economy in the current times?

This thought leadership examines these pertinent questions through an analysis of the results of our survey.

Recession indicators

Nearly 88% of the respondents believe that USA is either already experiencing recession or is likely to do so in the near term (4 to 6 months from now).

To curb inflation, the Federal Reserve had implemented a significant increase of 75 basis points in its key interest rate in June 2023 (the most substantial rise since 1994), followed by another increase of 25 basis points a few hours back. USA's economy faces several challenges, such as the decline in crude oil prices to below US$100 per barrel and a similar trend in other commodity prices. For instance, global nickel prices have dropped by ~50% from their 2022 peak, and aluminium prices have fallen by ~36%% from this calendar year's high.

Furthermore, a weakened consumer outlook and rise in unemployment claims are being viewed by some economists as potential indicators of a synchronized economic slowdown in USA. For the Federal Reserve to achieve a soft landing for USA's economy, it must influence a balance in measures that optimize employment with price stability. To consider easing interest rates it is essential for USA to witness a cooling of inflation, a reduction in credit spreads and lower mortgage rates.

While historical facts show that the yield curve inversion (which occurs when the interest rates on long-term bonds are lower than the rates on short-term bonds) is typically a precursor to an economic recession, there are contrary views to this theory in the current scenario (which are also supported by 12% of the respondents of our survey).

Some experts have termed the USA’s current monetary policy to be "restrictive at best" (after comparing the same to the past hiking cycles). This aspect has influenced a section of views that a recession, if it does set in firmly in the USA in the near future, is more likely to be mild, resulting in relatively low job losses, with certain sectors contracting moderately but the overall economy will be resilient to absorb the shocks and sail through.

Impact on India

India’s largest export market is the USA, with ~18% of India’s merchandise export market & over 60% of India’s IT-ITeS exports being to the US. Consequently, the growing fears of a recession in this destination with a consequent slowdown of demand for imports will be of concern to Indian exporters and is also likely to weigh on India’s export and investment outlook.

17% of the respondents have confirmed a negative impact of the economic situation in USA on their business in India over the last quarter and an additional 44% have classified this impact to be moderate. The main drivers for the same have been an extension of the decision-making timescale in the context of orders to India, especially in the areas of information technology & enhanced attention with a decline in discretionary spending by corporates in the USA (impacting exports from India) in the quarter ended June 30, 2023.

Simultaneously, India relies on imports for 80% of its crude oil consumption, making it significantly reliant on these imports to fulfil its energy needs. Fluctuations in crude oil prices play a crucial role in influencing various economic indicators in India, such as the current account deficit, inflation, growth, fiscal strength and the value of the Indian Rupee. Therefore, a decrease in oil prices would yield positive effects for India, particularly when considering the balance of payments. This would lead to a reduction in India's import expenses, bolstering its foreign exchange reserves and consequently strengthening the Indian Rupee. It is also widely believed that the robustness of India’s burgeoning domestic demand will fuel consumption (as it has in the past) and in the process insulate India from any significant negative impact of a global adverse economic event, such as recession in the USA.

To conclude, while the storm may not be as enormous as the financial crisis of 2008; and neither are India & USA are on the same boat this time, it is likely that the recession in USA (if it sets in) will have an impact on the Indian economy. Based on the current sentiment & indicators, the magnitude of such impact is widely believed to be relatively benign (or mild), as has also been stated by 44% of the respondents of our survey.

We trust that you have found this analysis to be insightful and look forward to your feedback at contactus@mgcglobal.co.in.

Best regards

Markets team

MGC Global Risk Advisory

About Allinial Global

Allinial Global (formerly PKF North America) is currently the world's second-largest member-based association (with collective revenues of approximately USD 5 billion) that has dedicated itself to the success of independent accounting and consulting firms since its founding in 1969. It currently has member firms in over 100 countries, who have over 28,000 professional staff and over 6,000 partners operating from nearly 700 offices across the globe.

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