Quantitative Easing, Currency Wars and its Global Impact

The US is initating a Global Currency War with its Quantitative Easing. The inflation that is supposed to happen in US due to Quantitative Easing is not happenning there but it is happening everywhere else. The FDI dollars are inflating the Stock and Commodity Prices stroking the inflation in India. Subba Rao, RBI Governer, says there is a hidden cost in maintaining the Dollar Rupee Exchange Rate.. Are Countries like India indirectly paying for the US excesses by trying to maintain the currency rates..


India and QE

India, like many other emerging economies, is finding it tough to cope with huge capital inflows as investors from the West seek higher returns in these markets, given their robust growth.

“The biggest problem thrown up by capital flows is currency appreciation, which erodes export competitiveness. Intervention in the forex market to prevent appreciation entails costs. If the resultant liquidity is left unsterilised , it fuels inflationary pressures. If the resultant liquidity is sterilised, it puts upward pressure on interest rates which, apart from hurting competitiveness, also encourages further flows,” Mr Rao said in his speech.

The Indian rupee has appreciated by nearly 6% since early September on the back of inflows of over $11 billion through the portfolio route alone. Central banks often manage huge capital inflows by buying dollars and infusing the local currency in order to protect their respective currency from steep appreciation. However, if inflows are too high, the central bank has to mop up the excess local currency by selling bonds or sterlising inflows. This puts upward pressure on interest rates. If inflows are not sterilised, there could be inflationary pressures . A few countries such as Thailand and Brazil have imposed controls on capital flows, but this has only stoked fears about more funds being diverted to Indian markets.

Subbarao said RBI has to manage the impossible trinity, which alludes to the fact that a central bank cannot manage its exchange rate, an open or liberal capital account and an independent monetary policy simultaneously.

An IMF analysis indicates that emerging Asian economies have done relatively well in sterilising the impact of reserves growth on their domestic financial systems, a Fitch Ratings report said. The report warns that there could be an adverse implication of the second round of quantitative easing, or QE2, on China and India.


China and Quantitative Easing

Dollar issuance by the United States is "out of control," leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

Chen Deming, speaking at a trade fair in southern China, said that exporters had done a good job of preparing themselves for exchange rate changes as well as rising labor costs, but were suddenly confronted with new challenges.

"Because the United States' issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems," Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticized U.S. monetary policy as being too loose before, but rarely in such explicit language.