Will end of QE II affect us?

Mon, 11 Apr Pre-Open

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The United States had embarked upon an economic support program to help its own economy out of the doldrums. These have been popularly referred to as QE-I (Quantitative Easing –I) and QE-II. However, the latest round of QE-II is expected to come to an end in June this year. And the US has not given any indication that it plans to extend this or round another round of QE-II.

Most economists and critics of the US Federal policy are quite happy with this decision. The major result of both rounds of quantitative easing was that there was a huge flux of easy money that was flooded into the global markets. A large part of this money found its way into the emerging markets which promised good returns on investment. As a result, emerging markets witnessed a sharp spike in asset prices. As a case in point, despite the turmoil in Middle East or the high oil prices, emerging markets have still continued to rise in the current year. This is largely thanks to the foreign investors and fund-houses who continue to invest in the emerging markets.

As a result, it is interesting to try and understand as to what would happen to these emerging markets once QE II comes to an end. When QE-II ends, there would be no new money that would be printed. At least not from the US. As a result, emerging markets would see a lot of correction in their asset prices as funds would pull out and start looking at US again. But one may argue that the correction may not be very sharp as the emerging markets do have their own economic strengths which would support them.

Unfortunately the conditions in these markets are not looking too good. Most emerging markets have seen inflation soaring to new levels. As a result, most of them have turned up their guards to bring the inflation rates under control. For instance, both India and China have been raising their interest rates rapidly. Brazil has put up measures to restrict the amount of capital entering its borders. While these measures are good if one has to deal with inflation. However, these measures would also restrict the economic growth in these countries.

This would mean that when QE-II ends, the emerging markets including India would face a double-edged sword. One the foreign funds that have been pouring money into them, would start to pull out. At the same time their counter- inflation policies would start to tell on their economic growth. As a result, they may end up witnessing huge correction in assets prices.