Just weeks after Urjit Patel, Governor of the Reserve Bank of India, wrote an op-ed in the FT warning that should the US maintain its current pace of monetary policy tightening, it could have serious repercussions for the global economy, it is...
It was the first time this tightening cycle that a prominent foreign central banker has accused the Fed of stirring trouble for emerging markets, with its ongoing tightening, and specifically, the balance sheet reduction coupled with the Treasury debt issuance surge, to wit:
Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.
Patel's advice? Immediately taper the tapering, or rather, the Fed should "recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing."
Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank's Aleksandar Kocic two weeks ago, and which we explained in "Why The Soaring Dollar Will Lead To An "Explosive" Market Repricing."
And Patel's warnings are coming true as The Fed's actions are impacting India as much - if not more - than anywhere else.
The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer.
As Bloomberg reports, Brent crude’s sustained gains since the middle of 2017 has led to a widening of the nation’s current-account and fiscal deficits at a time when global funds have become selective about their emerging-market investments.
The latest bout of weakness has been put down to Indian oil importer buying US dollars to pay for crude cargoes.
India relies on imports to meet about two-thirds of its fuel needs, and the International Energy Agency expects the country to remain the fastest-growing oil consumer through 2040.
“Given India’s current-account deficit, there is a need to fund it, but we are on track for a fifth consecutive month of bond outflows and the equity market has also been experiencing outflows,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.
Without a turnaround, the rupee may weaken past 70 per dollar, he said.
As Bloomberg notes, overseas investors have reduced holdings of rupee-denominated government and corporate bonds by $6.1 billion, and pulled $785 million from equities since the beginning of 2018.
The withdrawals have made the rupee the worst-performing currency in Asia, spurring analysts to put out bearish forecasts.
However, lots of chatter overnight that RBI stepped in to slow the Rupee's decline...We would not that this hasn't worked out too well for Brazil or Argentina in recent weeks.
Of course, the Rupee is not alone - Emerging Markets have been a bloodbath in the last few weeks as a soaring dollar and hawkish Fed sparked the 'usual' response from an over-levered and over-USD-debt-stuffed EM world.
Debt was the canary in the coalmine - but everyone ignored it. Then FX started to collapse - but everyone shrugged it off. But now EM stocks are getting monkeyhammered and the world is demanding The Fed stop the pain. They weren't complaining so much when The Fed was puking dollars to the world and lifting every asset class to hide their leveraged sins?
One can only imagine the chaos and turmoil in EMs (and then DMs) in the coming months, when not only the peak of the Fed's monthly shrinkage hits some time in October, but when for the first time since the financial crisis, global central bank liquidity will shift from a net injection to a net drain and then accelerate as both the ECB and BOJ proceed to taper their own Fed monetization.