INSUBCONTINENT EXCLUSIVE:
We live in interesting times
Emerging market currencies are now in a spot of bother
Home currency rupee recently crashed to new lows and reversed
And it has been a favourite tool of most central banks to stimulate their economies
In other words, loose money is nothing but a kind of economic stimulus that puts more money in the hands of consumers to spend and investors
to invest.
Why EM asset prices roseThe answer is simple
Capital started moving away from safe havens such as US Treasury and yen to riskier ones in emerging markets in search of better yield
The trend started after central banks started stimulating their economies after the global financial crisis of 2008-09
The whole point for investors was to get more and more returns, and they turned to EM assets as they, through risky, still delivered higher
returns.
Suddenly, demand for EM assets went through the roof, with ample money floating around
That drove the prices up to some unheard of levels
In contrast, developed countries such as the US and those in the euro bloc languished under recession, with ultra low interest rates
What is happening nowThe rate differential between the west and east is narrowing
The EM asset bubble has burst
Stocks are coming under pressure
The rupee is rolling downhill fast
Why is the pressure building upOne, oil prices are hardening
That means there will be more dollar flight from India as oil retailers shell out more for crude imports
Plus, the global dollar index, which tracks the movement of the greenback against a basket of currencies, is inching up
So is the US bond yield, which makes it more attractive for investors from the returns point of view.
Foreign investors too are pulling out
their money, from both stocks and bonds
The FII (foreign institutional investors) outflow still remains a big area of concern for RBI.
There is more
Recent trade data showed much of the import gains have been wiped off by a higher fuel bill
All these are ganging up and pushing the dollar away from emerging markets, including India, to western shores
End of an eraThe US Federal Reserve is firmly on a policy tightening cycle and is busy raising interest rates rapidly
This has triggered a reverse flow of portfolio money from emerging markets in search of better, safer growth
The European Central Bank is following suit, and has already announced plans to switch off bond buying by December-end
more confident of economic recovery, which they feel can help achieve the desired inflation levels and growth
No pushoverBut expect a fightback
Plus, the Reserve Bank of India is sitting pretty with a strong war chest of $430 billion forex reserves, which will allow it to cushion the
pressure on rupee for a fairly good length of time
But current account deficit is a worry, thanks mainly to a major surge in oil imports.
RBI firefights RBI is already in fire-fighting mode
Governor Urjit Patel in an article in Financial Times recently called on the Fed to slow down its balance sheet trimming so that the hit on
emerging economies can be moderated.
Musings from JapanFor its own reasons, Bank of Japan has chosen a different trajectory
On Friday, the message was very much clear
BoJ chief Haruhiko Kuroda repeated his promise to hold on to the stimulus until Japan hits the 2 per cent inflation target.
For going
The rupee's resolve is on test.
