With the Fed going for another round of taper at $10 billion, it is now evident that emerging economies (including India) are in close sync to ward off any destabilising impact on their domestic currencies, says SBI Research in its research note
The RBI (Reserve Bank of India) hiked the repo rate by 25 basis points on 28 January 2014 and the rate hike was ostensibly done with the purpose of reigning in inflation, but SBI Research believes it also served another purpose, warding of the contagion in the financial market. This is its opening remark in its research note of January 2014.
According to SBI Research, with the Fed going for another round of taper at $10 billion, it is now evident that emerging economies (including India) are in close sync to ward off any destabilising impact on their domestic currencies.
The year 2014 has already marked the start of the withdrawal of quantitative easing (QE) in the United States and a range of asymmetric policy responses across developed economies. SBI Research points out that the most desired and likely scenario is for the taper to follow a relatively orderly trajectory and for global interest rates to rise only slowly – reaching 3.6% only by mid-2016. Under this scenario capital flows to developing countries is projected to ease from about 4.6% of developing country GDP in 2013 to 4.1% in 2016, as investors take advantage of higher yields in high-income countries.
According to SBI Research, for emerging market economies, growth in 2013 was relatively weak, at an estimated 4.8%. It has been firming in recent months – partly reflecting strengthening growth in high-income countries, but also a recovery from earlier weakness in large middle-income countries, such as India and China. Overall, growth in developing countries is projected to come to about 5.3% this year and 5.5% and 5.7% in 2015 and 2016 respectively. India will not be an exception in this context.
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