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Forex party is ending - Times of India

India’s problem of plenty on the external sector – too many dollars coming into the country relative to those going out – appears to be coming to an end.

After nearly two years of ultra-accommodative monetary policy, the US Federal Reserve (Fed) at its December meeting announced it will double the pace of its balance sheet tapering and end its net asset purchases by mid-March 2022, three months ahead of its earlier schedule. The median projections also show more front loaded rate hikes in 2022 (three hikes) and eight cumulative hikes by the end of 2024. US monetary policy plays an important role globally. Experience since the 2008 global financial crisis has shown that, when the US eases (cuts interest rates and expands balance sheet), it triggers a global financial upcycle: capital inflows into emerging markets, EM local currency appreciation and higher asset prices. When US monetary policy heads towards the exit, the reverse occurs. The spillover effects on EMs from US balance sheet policies are also much larger than those from conventional policy, due to the liquidity effects.

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