'Emerging markets can't escape excess capital inflows'

Tuesday, 12 April 2011, 23:50 IST
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New Delhi: Lower interest rates in many developed countries have led to capital inflows into fast developing economies and caused currency appreciation, but the latter have little choice but to adjust to "excess" global liquidity, says a report. According to a report from global economic research firm DB Research, part of German banking giant Deutsche Bank, policymakers in the emerging market economies can respond to "excess" inflows in several ways, but none of these measures are likely to eliminate excessive capital inflows altogether. While, developing nations can allow the exchange rate to appreciate, this approach may diminish the attractiveness of local assets in the eyes of foreign investors, slowing economic growth and a deteriorating current account position. Though policymakers can adopt capital controls and macro-prudential measures to check the inflows, this may hit capital market liquidity. Another option for emerging markets is to lower interest rates to reduce the on-shore and off-shore yield differential, but this seems an unlikely option considering the rising inflationary pressures in the emerging market economies. As emerging markets have no way of influencing U.S. macro-policy, they are left with little tools to counter the effects of quantitative easing- driven capital inflows and the rising US government debt. The U.S. in contrast retains maximum policy flexibility, while its choices have a very tangible impact on, and create significant constraints for emerging markets. The report added that as long as other economies depend on the US market for their exports, they will be highly constrained in terms of policy options.
Source: PTI
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