Blu Putnam - Emerging Currencies in a "ZIRP" World

India, Others Face Tricky Job Balancing Growth, Inflation

Near-zero short-term interest rate policies, or "ZIRP," in the U.S., Europe and other developed countries and regions is a "huge complication" for emerging markets, as India and others are challenged to balance growth with holding inflation in check, CME Group Chief Economist Blu Putnam wrote.

In India, for example, capital control policies "emphasize a desire to maintain local control of foreign investment where possible," Putnam said in a December 18 report, "Emerging Market Currencies in a 'ZIRP' World," coinciding with the launch of a CME Group futures contract based on the Indian rupee.

A relatively insular country, India's domestic entities face a myriad of rules and restrictions when trying to move money outside the country, Putnam said. "While India appears to have amazing long-term potential, many observers see its heavy-handed bureaucracy, capital restrictions, and currency controls as being a drag on economic growth while making the control of domestic inflation extremely hard," he said.

India typically used control short-term rates as a tool for managing inflation expectations, while allowing the rupee to absorb the volatility. "This has been on display recently, as the rupee declined relative to the U.S. dollar due to concerns over India's policy toward foreign investment… (and) rising inflation pressures," he said.

To learn more about CME Group's new cash-settled Indian rupee futures (INR/USD), click here; for more information on physically delivered Chinese renminbi futures, scheduled to be launched February 25, click here.

Read Full Report