Emerging Economies and their Emirate

By Divya Shukla

My article titled “Is the crisis averted” talked about the impending threat of crisis emerging in the US due to default and its effect on other economies, courtesy the increased probability of extended QE. Now, we will be discussing the possibility of the US meeting the expectations of economic progress, as indicated by the pending job data and tapering of QE. If we map out a relation between the two scenarios, we’ll find  a perfectly negative correlation between the two. The emerging world was encouraged; “with some hopes” of revival in their markets. But, when it came to know that there is a pending release of job data in the US , they took a U-turn.

If we turn the pages of recent financial economic history, dated back to the sub-prime mortgaging crisis, markets in the developing world turned euphoric, with all the FIIs gushing in with capital into our bourses. Afterwards, our efficiency in having an insulation cover against the crisis because of so called “strong fundamentals” was also widely applauded. However, it was a mockery, when the reality of “not-so-strong” fundamentals, started unveiling the weakness and acerbically “our vulnerability to the external environment”.

India Inc. had already started feeling the repercussions. Inflation had also seeped in, which added to the difficulty for our business leaders to fight the disease head-on. Currency also started depreciating, which went down from the 45 in the year 2010-11 to 68 (before the Rajan effect), which was undoubtedly a VERY ABRUPT FALL. As those levels were not even predictable, the dollar was not hedged in that range, thus, eating up the profits.

Due to continuous ignorance and false reassurance from our policymakers in New Delhi, we are in a “deep mess”. There is a dearth of solutions; remedying one is having a negative impact on the other. So, whenever RBI announces a rate hike, the market and the currency touch new lows, but, if it does not, inflation crops up.

The currency issue has been in focus longer than expected due to its vulnerability. We are still fighting  this problem, and the cost paid ignores other relevant issues prevailing in the economy. Therefore, it’s like ridiculing the “benefits of globalization” when the world “partially cheers” the news of “partial shutdown” or even recession. And this gets clearly reflected in the net buying in these markets coinciding with such news pop-ups. That is why, when the US resumed business after the shutdown and a pending economic data on jobs, Asian markets were pulled down from five-month highs! The dollar is also getting stabilized, and therefore, a threat within the Asian community for QE reversal is germinating yet again.

The investors are now becoming abstinent from investing in the stock markets here and may be other emerging nations as well. It’s no rocket science to deduce the cause behind such abstinence. That is why, in India’s case, the appetite for gold is not going to witness the end any sooner. Time and again the TWC (third world countries) have been abashed to reveal their weakness whenever there are talks of economic improvement in our counterparts. The susceptibility has reached to such a magnitude that markets here get spooked at the slightest disturbance. India’s bottoming-out gets postponed continuously due to weakness in our fundamentals. The developing economies give the impression of being solely dependent on the FIIs in reviving their currency values. In conclusion, it can be said that the

CAD financing through capital flows has now more significance compared to the trade deficit in “moving the currency”. Needless to say, it is too volatile a factor BUT its influence cannot be curbed in the era of globalization, which has its own importance.

Divya is a graduate with a Major in Economics degree from the renowned University of Delhi and is about to enroll for  Master’s program in Financial Economics in Babasaheb Bhim Rao Ambedkar University, Lucknow. Whilst this journey of financial economics is a career path, has also developed a diverse field of interests, (especially in Economics, Politics, and Finance).