Letters to the editor

Feb 01 2014, 21:56 IST
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SummaryThe taper and EMEs

The emerging markets are in deep crisis at the moment with the tapering in the US. There are some problems in China as well whose growth rate is losing steam. Emerging markets are operating through the global financial system. During the recession in the US, the financial sector was shaken completely. First, the markets around the world lost value. Subsequently, with a view to revive the US economy, under the many existing fiscal pressures, the Federal Reserve opted for monetary stimulus. Three rounds of monetary stimulus were provided, the last, known as QE-III, stretching for longer than the first two. Whereas the US economy responded to monetary stimulus with the country's growth rate improving significantly, China has come under stress as its economy tries to make a switch from a manufacturing-led one to a service-led one. The improvement in the US economy has compelled the Fed to taper its stimulus. The emerging markets had seen their currencies affected when the news of tapering came last year. But now when the tapering is becoming gradual and certain, the markets are losing their value rapidly and the countries which are substantially commodities-exporting are getting severely hit as the demand for commodities in China is on the decline. Even as the recovery in the US was taking place, almost all the emerging economies had built up wide current account deficits due to real economic and fiscal policy glitches. China's current account deficit has, however, remained largely unaffected as imports by the country have fallen. Concordantly, there is a reduced inflow of foreign capital into emerging economies. The currencies of the vulnerable economies have depreciated sharply. India stood tall in the aftermath of the latest taper decision as it took measures to prop up its foreign exchange reserve, besides RBI making sound monetary policy decisions.

RK Arya, Faridabad

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