Residents in India and other emerging economies borrowed $34 billion by issuing debt securities in the international market during the last three months ending November, the Bank for International Settlements (BIS) has indicated.
While the "net issuance" of international debt securities almost halved to $475 billion during the third quarter of 2009, largely due to decline in borrowing activity of developed countries (-45%), "residents in emerging market economies took advantage of the improved financing conditions and issued $34 billion of international debt securities," noted BIS.
A worrying development in the global economy is the "rapid asset price increases" due to low interest rates in the United States, Europe and Japan, BIS suggested.
Further, emerging economies like India are also facing to contain substantial exchange rate appreciation of their currencies against the dollar as well as the growing "carry trade activity funded in dollars and other low interest rate currencies, stated BIS. Carry trade involves buying a high yielding currency like rupee with a low yielding currency like dollar, or "buy low, sell high" activity.
"The low interest rates in the advanced economies, together with the earlier and stronger recovery in a number of emerging economies, continued to drive significant capital inflows into the emerging markets, particularly in Asia and the Pacific," said BIS, the central bank of central banks, in its quarterly review.
"A related development is increasing foreign exchange carry trade activity funded in dollars and other low interest rate currencies," it suggested, arguing that "this has resulted in rapid asset price increase in several emerging economies as well as substantial exchange rate appreciation with respect to the dollar."
Though there is an appreciable turnaround in global economy, thanks to monetary and fiscal stimulus across many industrialised countries, "investor confidence remained fragile" during September-November 2009. Recent steep fall in prices of risky assets following Dubai World's failure to meet its debt obligations running into billions of dollars is a pointer to the state of investors' mood.
Market participants are also chary of pace and shape of economic recovery as well as the timing and speed of "withdrawal of monetary and fiscal stimulus." "The unease was compounded by uneven recovery in different parts of the world, which in turn was seen as increasing the risk that harmful imbalances could build, thereby adding to challenges for policy makers," argued BIS.
Further, "expectations of a prolonged period of low policy rates kept long-term government bond yields down, as did low term premia." Some market commentary, said BIS, "pointed to risk of higher inflation going forward." However, price pressures remain well contained in the industrialised countries, it noted.
Clearly, inflation is a major worry in the Indian economy with prices, particularly of food articles, 10 per cent higher than last year, said analysts.
"Banks' international balance sheets continued to contract during the second quarter of 2009, albeit at a much slower pace than in the preceding six months," said BIS, suggesting that "the $477-billion decline in total gross international claims of BIS reporting banks is considerably smaller than the reduction registered in the prior two quarters."
There was a rebound in notional amounts of all types of over-the-counter derivatives contracts during the first six months, which was estimated at $605 trillion at the end of June 2009. In contrast, said BIS, gross credit exposures fell by 18 per cent from 2008-end peak to $3.7 trillion.
