September 21, 2014
Abstract: In 2010, the spectre of currency wars due to large liquidity driven capital inflows into emerging market economies was a central concern. This also led to steep rise in crude oil prices, which hit importing countries like India particularly hard. However, by 2014, three “silver-linings” suggested a relatively stable economic climate for India, as enumerated below:
- Significant softening in commodity prices, especially oil.
- Broad recovery of the US economy thus creating a healthy global demand for goods and services.
- Portfolio rebalancing among investors considering a longer time horizon for investments, leading to greater global financial stability.
Two lessons for India are: (a) the best protection against global shocks is a healthy domestic macroeconomic position, and (b) a relatively stable global situation provides an excellent opportunity to clean out the macroeconomic house.
Keywords: G-20; currency wars; currency appreciation; capital inflows; portfolio rebalancing
