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HindustanTimes Wed,27 Aug 2014

India not worst hit, US’s stimulus rollback signals hit most economies

Gaurav Choudhury , Hindustan Times  New Delhi, August 27, 2013
First Published: 00:51 IST(27/8/2013) | Last Updated: 03:39 IST(27/8/2013)

It's not in India alone where stocks and currencies have contracted a global flu after investors began flocking to safer locations such as the US ever since Federal Reserve chief Ben Bernanke hinted about rolling back the policy of pumping in cheap money to aid recovery in the world's-largest economy.

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Ever since the world recovered from the dotcom bust and found a new mantra—emerging markets (EM) — foreign investment, both direct and financial, has been chasing an India Story that delivers returns in high double digits a year. The tide has since turned.

All of a sudden, fresh question marks loom over these economies where governments and monetary authorities have much less elbow room to spend its way out of a crisis.

"EM markets are transitioning to an environment of less-rapid EM growth, a firmer US economy and a further repricing of US asset prices. But there are still multiple sources of official liquidity," Barclays Research said in a recent research report.

China, Brazil, Russia and several other emerging nations such as the Philippines, Indonesia, Thailand and Turkey are suffering from the same syndrome prompting policymakers to soothe nervous markets with reassurances on the domestic economies' strong fundamentals.

For instance, the Brazilian Central Bank has announced a new intervention programme for the rest of the year. The bank will intervene on a daily basis to manage liquidity and central bank also stated that it can run additional interventions if it deems necessary.

"The measure should help contain excessive bearishness around the Brazilian Real and even bring it back to the 2.35-2.40 range. But the measure should not reverse the weakening trend of the currency," Barclays said.

In India, the Reserve Bank of India (RBI) and the government have announced a string of measures of including curb on gold imports, foreign exchange controls for companies and individuals and easier investment norms for a host of sectors such as telecom and high-tech defence.

Analysts warned of more pain, particularly for Asian emerging economies, as the world settles down to state of stronger dollar and rising interest rates.

"If the rise in the US dollar were to continue for longer, this will bring Asia to a situation that would be similar to the 1990s," Morgan Stanley, investment banking major, said in report.

"The rise in real rates amid a slowing GDP (gross domestic product) growth environment – in other words – a pro-cyclical tightening of monetary policy, will pose considerable headwinds to the region's growth outlook,'. Though the depth of the current growth slowdown is likely to be shallower than in previous episodes of rising real rates, the recovery, when it happens, will also likely be less vigorous," Morgan Stanley said.

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