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It will soon be four years since Ben Bernanke set off the infamous taper tantrum, when he first hinted that quantitative easing was coming to an end. Western central bankers now grudgingly accept that their policies impact emerging market economies—and not always in positive ways. The massive expansion in the US monetary base after 2009 created asset bubbles and excess foreign currency borrowing in countries such as India.
What will be the impact of the anticipated US rate hikes on financial conditions in emerging markets? The balance sheet of the US Fed is also expected to shrink from this year. One influential US central banker—who is a top-notch economist as well—believes that foreign central banks are better placed than before to manage the effects of tighter US monetary policy. Stanley Fischer said in a speech this week that the strengthening of emerging market currencies as well as the decline in emerging market bond yields is proof that the adjustment will be smooth.
Yet, there is ample reason for the Reserve Bank of India to not let its guard down.