FDI, FII investment, foreign loans may improve
Japan’s $1.4 trillion quantitative easing (QE) programme to revive
its deflationary and recession-hit economy might do more good than harm
to the Indian economy, which has just about started showing signs of
recovery.
Indian policy planners and economy watchers believe that while the market may continue to feel the heat of short-term global fluctuations, Japan’s quantitative easing may indirectly help India in financing its burgeoning current account deficit, now at over five per cent of GDP, if it leads to an improvement in capital inflows by way of FDI, portfolio investment and overseas borrowing over the next six months.
While signs of skepticism within the Japanese central bank over the QE measures triggered another sharp drop in the Nikkei, the country’s equity benchmark, on Monday, global markets largely shrugged off the turbulence. India’s Sensex shot up 326 points, or 1.66 per cent, to get past the 20,000 mark.
Quantitative easing is an unorthodox way of stimulating an economy, by pumping money into the system to keep long-term interest rates down and fuel demand. Since interest rates had declined to near-zero levels in most industrialised nations following the global financial crisis, the scope for further monetary easing through policy rate cuts became limited.So these nations have introduced quantitative easing and other asset purchase programmes under exceptional circumstances.
The quantitative easing announced in Japan is much bigger in size than the one being implemented by the United States.
Japan was the first country to begin quantitative easing with a 50 trillion yen programme carried out during 2001-06. Developed countries like the US, Europe and the UK have resorted to it only in the aftermath of the 2008 global crisis.
Japan relaunched a quantitative easing programme last month. While the US committed $1.75 trillion under the programme being implemented in three phases, the euro zone has set aside 489 billion euros and the UK £200 billion. Japan has unleashed a fresh 136 trillion yen programme beginning this April.
Shubhada Rao, chief economist of Yes Bank, told the Financial Chronicle on Monday that India’s concerns over the quantitative easing programmes were limited at this point. In fact, an improvement in growth and investor-friendly policies in the domestic economy could turn the tide, which could in turn support investor interest in the India growth story.
“But there is no denying the fact that financial markets might feel some impact in the interim period. Right now, withdrawal of the US quantitative easing remains mere talk. Actual easing is some time away and will depend on the labour market conditions there,” she said.
Equity market analysts say a part of the money from Japan’s QE should flow into emerging market equities, including India, and that may, to a large extent, absorb the shock of withdrawal of the US programme.
Quantitative easing and its impact on emerging economies, including India, is expected to figure prominently during prime minister Manmohan Singh’s discussions with the Japanese leaders on global and bilateral economic issues during the course of this week. Singh arrived in Tokyo on Monday on the first leg of his two-nation tour of Japan and Thailand.
India’s leading economist and national statistical commission chairman Pronab Sen told FC that though the liquidity flow might come in handy to finance the current account deficit, it also had the potential to fan inflation in the medium term by causing volatility in global commodity prices.
Japan’s QE was largely targeted against China and South Korea and if that was the case, Chinese and South Korean exports to Japan might be hit and that would help push down global commodity prices, Sen said. “This would help emerging economies like India, which imports 80 per cent of its crude oil requirement.”
“We may feel the real impact six months down the line, but we would have rebalanced our own economy and growth would have picked up by that time,” said Rao of Yes Bank.
“In the interim, we could see some pressure points in the market, but one week’s market conditions do not establish a trend,” she added.
Attracting FDI from Japan and growing bilateral trade are key focus areas of the prime minister’s visit to Tokyo. Foreign direct investment (FDI) from Japan to India stood at $12.3 billion during 2000–2012. Japan is the fourth largest investor in India after Mauritius, Singapore and Great Britain.
Indian policy planners and economy watchers believe that while the market may continue to feel the heat of short-term global fluctuations, Japan’s quantitative easing may indirectly help India in financing its burgeoning current account deficit, now at over five per cent of GDP, if it leads to an improvement in capital inflows by way of FDI, portfolio investment and overseas borrowing over the next six months.
While signs of skepticism within the Japanese central bank over the QE measures triggered another sharp drop in the Nikkei, the country’s equity benchmark, on Monday, global markets largely shrugged off the turbulence. India’s Sensex shot up 326 points, or 1.66 per cent, to get past the 20,000 mark.
Quantitative easing is an unorthodox way of stimulating an economy, by pumping money into the system to keep long-term interest rates down and fuel demand. Since interest rates had declined to near-zero levels in most industrialised nations following the global financial crisis, the scope for further monetary easing through policy rate cuts became limited.So these nations have introduced quantitative easing and other asset purchase programmes under exceptional circumstances.
The quantitative easing announced in Japan is much bigger in size than the one being implemented by the United States.
Japan was the first country to begin quantitative easing with a 50 trillion yen programme carried out during 2001-06. Developed countries like the US, Europe and the UK have resorted to it only in the aftermath of the 2008 global crisis.
Japan relaunched a quantitative easing programme last month. While the US committed $1.75 trillion under the programme being implemented in three phases, the euro zone has set aside 489 billion euros and the UK £200 billion. Japan has unleashed a fresh 136 trillion yen programme beginning this April.
Shubhada Rao, chief economist of Yes Bank, told the Financial Chronicle on Monday that India’s concerns over the quantitative easing programmes were limited at this point. In fact, an improvement in growth and investor-friendly policies in the domestic economy could turn the tide, which could in turn support investor interest in the India growth story.
“But there is no denying the fact that financial markets might feel some impact in the interim period. Right now, withdrawal of the US quantitative easing remains mere talk. Actual easing is some time away and will depend on the labour market conditions there,” she said.
Equity market analysts say a part of the money from Japan’s QE should flow into emerging market equities, including India, and that may, to a large extent, absorb the shock of withdrawal of the US programme.
Quantitative easing and its impact on emerging economies, including India, is expected to figure prominently during prime minister Manmohan Singh’s discussions with the Japanese leaders on global and bilateral economic issues during the course of this week. Singh arrived in Tokyo on Monday on the first leg of his two-nation tour of Japan and Thailand.
India’s leading economist and national statistical commission chairman Pronab Sen told FC that though the liquidity flow might come in handy to finance the current account deficit, it also had the potential to fan inflation in the medium term by causing volatility in global commodity prices.
Japan’s QE was largely targeted against China and South Korea and if that was the case, Chinese and South Korean exports to Japan might be hit and that would help push down global commodity prices, Sen said. “This would help emerging economies like India, which imports 80 per cent of its crude oil requirement.”
“We may feel the real impact six months down the line, but we would have rebalanced our own economy and growth would have picked up by that time,” said Rao of Yes Bank.
“In the interim, we could see some pressure points in the market, but one week’s market conditions do not establish a trend,” she added.
Attracting FDI from Japan and growing bilateral trade are key focus areas of the prime minister’s visit to Tokyo. Foreign direct investment (FDI) from Japan to India stood at $12.3 billion during 2000–2012. Japan is the fourth largest investor in India after Mauritius, Singapore and Great Britain.
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