China’s tough task
The rout in the Chinese bond markets this week deserves to be watched closely as an indication of how smoothly the overdue deleveraging in that country progresses. Bond yields have spiked to the highest level in three years as normal selling activity returned at the end of the Chinese Communist Party Congress. China has kept economic growth on track in recent years, partly because of a borrowing binge that now worries many economists.
What this means is that interest rates in the two most important countries in the world could be inching up, though for very different reasons.
Bond yields have been moving up in the US, thanks to the accelerating economic recovery as well as signals that the US Federal Reserve is ready to move away from the extraordinary monetary policy it has pursued since 2009.
India may not be directly affected by hardening interest rates in the US and China, but policymakers will have to keep a close eye on whether capital inflows get disrupted in the months ahead.