We live in interesting times.
The shoe is on the other foot, as we talk about easy or loose money policy.The shift of capital from emerging markets (EMs) is already taking hold.
Most emerging markets enjoyed the fruits of developed markets easy money policies for almost a decade now.But things are changing fast.
Emerging market currencies are now in a spot of bother.
Home currency rupee recently crashed to new lows and reversed.
What is loose money, reallySimply speaking, its cheap credit where money supply goes up and people invest extra funds in assets in search of better returns.At the policy level, its also known as quantitative easing.
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.
India is no exception.
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.
At over 2 per cent, Indias current account deficit (CAD) is looking dangerous for now.
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.
That should accelerate the dollar flow from emerging markets.The common threadThere is a pattern to it central banks are getting more and more confident of economic recovery, which they feel can help achieve the desired inflation levels and growth.
No pushoverBut expect a fightback.
Indias fundamentals are looking good.
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 against the wind, BoJ cited an entrenched deflationary mindset, which doesnt exist in the US or Europe.The play is on.
The rupee's resolve is on test.