Washington, Sep 19: The US central Bank’s surprise decision to keep its economic stimulus in place came as a great relief to India as it’s the most vulnerable of emerging economies impacted by US economic policies, analysts say.
US Federal Reserve Chairman Ben Bernanke announcement Wednesday that it would continue its programme of buying up $85 billion in bonds every month for the foreseeable future sent emerging market currencies and stocks rising, Foreign Policy magazine noted.
While Bernanke’s stimulus package has been primarily aimed at stimulating weak demand in the US and papering over fiscal gridlock in Congress, it also vastly increased liquidity, much of which has been invested over the past few years in emerging markets, the magazine said.
“But with Bernanke’s announcement in May that the Fed would begin slowing bond purchases, much of the money that has rushed into emerging markets has begun to come back,” Foreign Policy said putting “enormous pressure on emerging markets depreciating currencies against the dollar.”
“With Wednesday’s announcement, emerging market currencies rallied across the board, bringing welcome relief to central bankers who had announced programmes to prop up local currencies against pressure from the Fed’s withdrawal,” it said.
India, “was by far the worst hit by the recent capital flight,” Foreign Policy noted with its economy “currently struck by a combination of economic problems” including a huge oil bill and declining currency “its “current account deficit was rapidly becoming unsustainable,” the magazine said.
“Wednesday’s announcement was not enough to send the rupee soaring — the currency bounced back and forth amid volatile trading — but it at least helped to halt its slide, for now,” Foreign Policy noted.
But “Despite the cheers heard around the world today, at some point the party will have to end, and Uncle Sam will wind down what amounts to an ultra-loose monetary policy,” it noted and “countries like India will be praying that they are ready when that day comes.”
Market Realist, an investment research company also rated India as “likely the most vulnerable country right now” noting its “currency depreciation, persistent inflation, and supply-constrained meagre growth have the government tied in terms of potential policy corrections.”
In the short term, the situation is likely to worsen. Even a year out, the prospects don’t seem as clear, and if the interest is long-term, there will probably be better entry points down the line. Investors see this outlook, so outflows may not slow,” it said.