The RBI Governor opined that the increased rates and changes in the fiscal policy of US Government, could possible affect the global markets and more so the emerging markets. Also, the Governor Mr. Urjit Patel that the policies of US in the past had caused the Latin American Debt Crisis, and now the crisis could even be more. He feels that the interest rate hikes by the US Federal Reserve Bank, in line with the increased expansionary fiscal policy could bring this adverse risks.
While addressing the RBI Central Board meeting, the RBI Governor added that steps are required to calm down the volatility and increased risks in the global and domestic financial markets. However he was not sure of the proposed steps in this direction.
- Ten year treasury yields have hit a four year high figure of 2.88% in the US last week, which has brought a fear of higher inflation and bigger fiscal deficits, and in turn an increase in the Interest Rates.
- US stock market had a great hit on their stocks in the last two years period, which boomeranged the global markets, resulting in a huge crash of the stock markets.
- Budget deficit of US fell from 9% of GDP in 2010 to 3% in 2016. Federal might bring an increase in the rates, in line with the economic changes.
- It is also felt that emerging economies which is more vulnerable to a quick outflow of capital drawn by higher yielding US Debt, and are under great threat. These emerging economies received $700 in the form of capital last year.
- The Governor also felt that due to the reason that more and more emerging markets are open to large international capital flows, debt and equity, can possibly, lead to an improvement in the potential risks.
- Also, increased interest rates and a positive currency management are the ways possibly could result in speedy outflows of capital and currency depreciation.