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OpinionComment

Asia can weather any interest rate storm

The raising of interest rates by the US Federal Reserve should hold no fear for China, India and other Asian economies

Reading Time:4 minutes
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While the major emerging markets of Asia may be among the most vulnerable to harm from an interest rate increase, each is uniquely positioned to effectively respond.
Steven Keithley
When the US Federal Reserve announced this month it would raise interest rates for the first time in almost a decade, reactions from investors and commentators could not have been more divergent. While markets from the Shanghai Composite Index to Spain’s Ibex rallied, several pundits were quick to lament the effects of chairwoman Janet Yellen’s decision, especially in the emerging markets of Asia, where capital outflow is a niggling fear.

READ MORE: Why US Fed’s interest rate hike is only a small step in the trek ahead

While their concern stemmed from plausible predictions of how “typical” FDI-dependent economies might react to an interest rate hike, their analyses always fail to consider the circumstances and capabilities which make Asia’s emerging economies anything but typical, and that could allow them to avoid much of the predicted panic.

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Theoretically, an increase in interest rates and the end of so-called “cheap money” should encourage the movement of investment capital to wherever those higher interest rates exist (in this case, the United States), potentially devastating the economies that had become used to their positions as recipients of cheap capital (in this case, the developing economies of Asia).

However, what that theory assumes, and why it is best left in introductory economic texts rather than the editorial pages of prominent media outlets, is an inability of the recipient countries to take preventative measures via mechanisms like quantitative easing, the reduction of domestic interest rates or the use of their foreign exchange reserves.

Any substantive inquiry into the major emerging markets of East Asia illustrates the inaccuracy of that assumption.

READ MORE: IMF forecasts Hong Kong market troubles in the wake of US interest rate hike

The Indian rupee has not seen its value significantly diminished, and even appears to be on track to maintaining its relative strength against the dollar. Photo: AFP
The Indian rupee has not seen its value significantly diminished, and even appears to be on track to maintaining its relative strength against the dollar. Photo: AFP
India, Asia’s third-largest economy, seems particularly capable of mitigating any ill effects of Yellen’s announcement. Over the past weeks, unlike some other nations, its currency, the rupee, has not seen its value significantly diminished, and even appears to be on track to maintaining its relative strength against the dollar.
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Notably, the few reforms which have passed under Prime Minister Narendra Modi have combined with the steady pace of the country’s infrastructure development to put India on a trajectory to achieve the world’s highest growth rate in 2016. This has placed the rupee in a positive long-term position even before the Fed’s announcement earlier this month.

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