There was always good reason to believe that the first moves to exit loose monetary policies would come from Asia, where the economic recovery has been fastest and seems most sustainable.
Illustration: Jayachandran / Mint
China has taken the lead following strong industrial and export growth. The People’s Bank of China on Tuesday increased the yield on one-year government bills by 8 basis points and also sucked out some 200 billion yuan through repurchase agreements, while announcing a 50 basis points hike in banks’ reserve requirements. These moves come a week after the yield on three-month Chinese bills was increased by 4 basis points.
India will decide on its next monetary policy move at the end of the month. Though it makes sense for the Reserve Bank of India to wait till the government unveils its fiscal policy at the end of February before making any drastic changes in monetary policy, the smart recovery in industrial growth and trade in the midst of growing inflation fears could force the Indian central bank to send out a strong signal, perhaps by draining liquidity from the money market by increasing the cash reserve ratio.
The world has yet to see a headline-grabbing increase in interest in any of the major economies, but there have been quiet moves to wind down some of the extraordinary measures taken after September 2008 to prevent a complete economic rout in the aftermath of the financial crisis.
The US Federal Reserve is set to withdraw the currency swaps it offered European central banks during the worst panic, when continental banks were gasping because of a shortage of dollars. The European Central Bank and the Bank of England are no longer faced with long queues of banks trying to borrow dollars that these central banks had thanks to the swaps with their American cousin.
The US has also been cutting back its term auction facility, which was introduced in late 2008 to provide emergency liquidity support to wobbly banks. The minutes of the meeting of the US Federal Reserve that took place on 16 December were released on 6 January. They show that the US central bank hopes to further scale back this scheme of emergency short-term loans.
These are signs that central banks are getting ready to tighten liquidity even as they wait for more signs of economic recovery before they hike interest rates. How this exit from monetary stimulus will be planned is critical. The exits will have to be gradual. Sudden policy reversals could rattle equity, currency and bond markets, or trigger another round of financial instability.
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