Monday, October 11, 2010

Emerging Market Economies Leading Global Growth...But for how long?

Over the weekend lot of discussion happened at IMF,Washington DC and below RBI governor's comments on Role of Emerging Economies Going Forward and Key Policy Challenges

Here he talks about the Role of Emerging markets played in pulling the global markets from near depression and how its going to make impact to the rest of world going forward.

I guess when the EM was at peak in 2007  and rest of developed countries at the start of downward direction i  remember few saying that EME are decoupling from the rest of developed economies and EM will go up..but what happened  after that...every one knows....and same set of people after the crash in 2008 said that EM are  recouping with the rest of the world....Now fast forward from there to 2010 the same set of people :) are again started to say that we are decoupling again from the rest of the rest of world is still struggling from the wounds it got from the crash and are growing near 2 % to 3% when EME are going at near 8% to 9% .

So how is this happening ? Basically there is plenty of Liquidity across the developed nations which is sitting idle as there are very less opportunities in there regions for growth so a whole lot of money is being pumped to EME. Now Question is how much more can they pump into these economies? It depends if US going for another round of QE2 (probability of happening this is there wounds are not healed enough...same with the case of EU....) then i strongly believe that EME are going to see huge inflows which are never seen or heard. At least in India FII inflow is going to touch 1 trillion for the first time..

Another question coming to my mind..What if due to a policy decision are another unknown reason if money starts flowing out of EME..what is going to happen? and economy as such will go in South direction.

But before that happening can our regulators or persons with power can make some decisions to arrest the flow if such kind of event happening in near future and RBI governor said this at IMF over weekend
Furthermore, in evaluating the level of reserves and the quantum of self insurance of a country, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity.
India falls in the latter category. Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses
I doubt it...cause one reason might be RBI going soft under the pressure from Ruling parties and key allies  are going for elections in some states...

It would be interesting to watch the policy makers game on tacking inflation,BOP and Exchange rate  in coming days ...

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