QE II- What is in store for emerging nations

The latest crutch that the failing US economy has been given is a $600 billion spending pro gramme, through June 2011 popularly named QE II (Quantitative Easing II). In the absence of perceptible economic growth coupled with deflation, as well as 26 year high unemployment levels, this perhaps, was the best alternative.

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Of course, this comes after failed attempts with near zero interest rates and massive security buy backs. This time, the Fed aims to lower interest rates, fuel lending, inflation and asset prices to boost the economy.

However, this move has been highly criticized by all quarters of emerging markets. The group expects excessive capital flowing in, creating problems of many sorts, like increasing inflation, higher interest outgo on sterilization bonds, appreciation of domestic currency and volatility.

50 days into QE II there have been faint signs of recovery in the US economy with jobless claims reducing, S&P moving up and a strong dollar, surprisingly without a drop in interest rates. On the other hand, emerging nations have not witnessed increased flows and remain relatively stable on the currency front too; contrarily markets like India have been subjected to selling pressure by foreign investors. But commodity prices have edged higher causing inflationary pressures.

Consequently, it looks like QE II has not hurt the emerging nations after all. Improved trade and financial relationships amongst themselves, strong domestic growth, and reduced susceptibility to volatility propels the growth trajectory of emerging markets. Well developed deep financial markets to manage capital inflows would be the icing on the cake.

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