Saturday, September 20, 2014

The Tale of 3 Central Banks!

Central banks around the world are going through a phase which need maneuvering every time in order to sustain the drastic domestic headwinds and the harsh external shocks. Across the globe, there are two such central banks which are closely watched always and have given clues of what is about to come in couple of weeks. These references of what is about to come acts as a cushion for the rest of the world to get its financial act together and sustain the changes with ease. However, for last couple of months there have been some changes which has raised eyebrows of economists around the globe and made them think on their toes to counter the unprecedented events from two major developed nations.

On one hand, Federal Reserve is pondering over the much debated issue of "When to move up from Zero-Lower Bound?" with the final taper act in couple of months and on other hand the lack of take-up for the TLTROs (Targeted Long Term Refinancing Operations - under which banks could disburse loans at an interest rate of 0.15% for four years provided they increased lending to businesses or households) will force the ECB into more drastic action, including buying government bonds under a quantitative easing programme. The actions of major developed economies have forced the developing economies to keep a hawk-eye on the easy money flowing in their countries and their after effects. Reserve Bank of India led by Dr. Raghuram Rajan has reiterated the effects of saturation of the present easy money from the economy. It’s depreciating effect on the currency and the bubble creation in Real Estate and Stock Market (with many believing that markets are way over their sustained fundamentals).

In this case foreign investors’ flight for safety would pressurize the currency and when ECB's easy money flowing into the economy would soon become a reality, focusing on the fundamentals for an emerging economy would be the survival mantra. It is a mantra that can help us tackle the external headwinds with enough ammunition. Easing Consumer Price Index at sub 7.7% levels, with our crude basket at sub $100/barrel levels and with monsoon deficit receding at present 10% from a scary 20 plus percentage a month back coupled with pro-reforms action taken by the majority backed governments highlights are strong fundamentals and preparedness to face the external economic pressure with much confidence.

Though as of now the Indian economy has sustained the taper effect quiet comfortably, I am still curious about the after effects of, A) "Flight for Safety" on the domestic economy with interest rates being raised from the Zero Bound level and B) Europe’s easy money pouring into the emerging economies.