(ATF) The Covid-19 crisis has led to central banks around the world easing interest rates to all-time lows and unprecedented liquidity injections to restore order in financial markets. This excess liquidity has intuitively found its way to the Emerging Markets (EM), given their relatively higher yields and improved external balances.
India stands to benefit as one of the favoured Emerging Markets, given its large consumption-driven economy under a stable political regime and large foreign reserves.
Last month, we witnessed a watershed moment with the US Federal Reserve charting a new course in its monetary policy, signalling an appetite to allow inflation to move above 2%, in order to reach a long-term inflation average of 2%. To put things in context, over the past 12 years, the Fed could hit its 2% inflation target only for a brief period of 2 months, so the revised strategy implies very low interest rates for a prolonged period. Whether the inflation objective is achieved or not will have to be seen, however, given Japan’s experience of remaining in a liquidity trap for two decades, we can safely assume it will take a while before inflation becomes a problem in the United States.
