Thought for the day
"Treat those who
are good with goodness, and also treat those who are not good with goodness.
Thus goodness is attained. Be honest to those who are honest, and be also
honest to those who are not honest. Thus honesty is attained."
- Lao Tzu (Chinese5th or 6th Century BC)
Word for the day
Entelechy (n)
A realization or actuality as opposed to a potentiality.
(Source: Dictionary.com)
Malice towards none
Why the act of preventing the Parliament from functioning
is not unconstitutional, unlawful or in stronger words - seditionist?
I know it, tell me something new
Last week, I had a chance to interact with some market
participants and economists. I was not surprised to find that the today's RBI
meet evoked almost nil interest amongst them. Most of them were rather
indifferent to the RBI's likely move on rates. The recent Reuters poll (see
here) which suggested that an overwhelming majority believes that governor
Rajan will maintain status quo also reflects this attitude.
The discussion on the likely time schedule of rate hike by US Fed
and its potential impact on Indian economy and markets was however intense and
evoked keen interest from all participants.
I was part of a insignificant minority who believed that the
markets have already assimilated the US rate hike cycle and may not get
startled by a rate hike late this summer. A trajectory much steeper than
presently estimated may though surprise the market.
Insofar as the impact of US rate hike on economy is concerned, I
agree with the views of of Nouriel
Roubini. I find myself incompetent to add anything therefore reproducing it
as it is:
"The prospect that the US Federal Reserve will start exiting
zero policy rates later this year has fueled growing fear of renewed volatility
in emerging economies’ currency, bond, and stock markets. The concern is
understandable: When the Fed signaled in 2013 that the end of its
quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum”
sent shock waves through many emerging countries’ financial markets and
economies.
Indeed, rising interest rates in the United States and the ensuing
likely rise in the value of the dollar could, it is feared, wreak havoc among
emerging markets’ governments, financial institutions, corporations, and even
households. Because all have borrowed trillions of dollars in the last few
years, they will now face an increase in the real local-currency value of these
debts, while rising US rates will push emerging markets’ domestic interest
rates higher, thus increasing debt-service costs further.
But, although the prospect of the Fed raising interest rates is
likely to create significant turbulence in emerging countries’ financial
markets, the risk of outright crises and distress is more limited. For
starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s
intention to hike rates this year, clearly stated over many months, will not.
Moreover, the Fed is likely to start raising rates later and more slowly than
in previous cycles, responding gradually to signs that US economic growth is
robust enough to sustain higher borrowing costs. This stronger growth will
benefit emerging markets that export goods and services to the US.
Another reason not to panic is that, compared to 2013, when policy
rates were low in many fragile emerging economies, central banks already have
tightened their monetary policy significantly. With policy rates at or close to
double-digit levels in many of those economies, the authorities are not behind
the curve the way they were in 2013. Loose fiscal and credit policies have been
tightened as well, reducing large current-account and fiscal deficits. And,
compared to 2013, when currencies, equities, commodity, and bond prices were
too high, a correction has already occurred in most emerging markets, limiting
the need for further major adjustment when the Fed moves.
Above all, most emerging markets are financially more sound today
than they were a decade or two ago, when financial fragilities led to currency,
banking, and sovereign-debt crises. Most now have flexible exchange rates,
which leave them less vulnerable to a disruptive collapse of currency pegs, as
well as ample reserves to shield them against a run on their currencies,
government debt, and bank deposits. Most also have a relatively smaller share
of dollar debt relative to local-currency debt than they did a decade ago,
which will limit the increase in their debt burden when the currency
depreciates. Their financial systems are typically more sound as well, with
more capital and liquidity than when they experienced banking crises. And, with
a few exceptions, most do not suffer from solvency problems; although private
and public debts have been rising rapidly in recent years, they have done so
from relatively low levels.
In fact, serious financial problems in several emerging economies
– particularly oil and commodity producers exposed to the slowdown in China –
are unrelated to what the Fed does. Brazil, which will experience recession and
high inflation this year, complained when the Fed launched QE and then when it
stopped QE. Its problems are mostly self-inflicted – the result of loose
monetary, fiscal, and credit policies, all of which must now be tightened,
during President Dilma Roussef’s first administration.
Russia’s troubles, too, do not reflect the impact of Fed policies.
Its economy is suffering as a result of the fall in oil prices and
international sanctions imposed following its invasion of Ukraine – a war that
will now force Ukraine to restructure its foreign debt, which the war, severe
recession, and currency depreciation have rendered unsustainable.
Likewise, Venezuela was running large fiscal deficits and
tolerating high inflation even when oil prices were above $100 a barrel; at
current prices, it may have to default on its public debt, unless China decides
to bail out the country. Similarly, some of the economic and financial stresses
faced by South Africa, Argentina, and Turkey are the result of poor policies
and domestic political uncertainties, not Fed action.
In short, the Fed’s exit from zero policy rates will cause serious
problems for those emerging market economies that have large internal and
external borrowing needs, large stocks of dollar-denominated debt, and
macroeconomic and policy fragilities. China’s economic slowdown, together with
the end of the commodity super-cycle, will create additional headwinds for
emerging economies, most of which have not implemented the structural reforms
needed to boost their potential growth.
But, again, these problems are self-inflicted, and many emerging
economies do have stronger macro and structural fundamentals, which will give
them greater resilience when the Fed starts hiking rates. When it does, some
will suffer more than others; but, with a few exceptions lacking systemic
importance, widespread distress and crises need not occur."
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