Slight Wave In U.S. Economy Causes Major Tremor In India

By siliconindia | Monday, 02 September 2013, 12:47 Hrs

Bangalore: The economic downfall in India and the weakening rupee are the major areas of concern among people since past few weeks. The government of India has been facing criticism from all ends due to its inefficient measures to strengthen the country’s economy. The effect of changes in U.S. economy is, however, not restricted to India alone. With cheap money coming to an end after getting signal from U.S. monetary authorities, the staggering effects on stocks and currencies of emerging market is prominent, reports Avinash Celestine of The Economic Times.

The foreign investors made maximum use of the global ‘carry trade’ under which they purchase a currency that yields high interest rate with funds they get by selling another currency with relatively low interest rate. However, the end of the ‘easy money’ is forcing investors to pull out which can be devastating for the economy. When global capital pulls out, the situation in domestic market should not be impacted at least in the short term.

Questions now arise for the central banks across the globe as to why a slight change in the U.S. monetary policy brings waves of change in the emerging markets. There is no doubt that it is not easy to make monetary policy in a world where to and fro of foreign capital takes place. It is not possible to attain all the three elements like open capital account, fixed exchange rate and, control over monetary policy, up and running in the economy. At the most, only two of these elements can be achieved. Indian policy makers have settled for –control over monetary policy since the 90s. They have eased capital control and allowed the rupee to float.

To make out a relation between global assets in the world and VIX (volatility index) index, London Business School economist Helene Rey has presented a research paper at a conference of central bankers in the US. She points out that only a few factors impact the return on different range of assets across the globe.