A number of emerging market economies are experiencing increasing financial market pressures as the appreciation of US dollar has raised servicing costs on their dollar-denominated foreign debt.
In an article, the Reserve Bank of India governor Urjit Patel, said that dollar funding of emerging market economies has been in turmoil for months now. Unlike the previous turbulence, this episode cannot be attributed to US Federal Reserve's move on interest rates, which have been rising steadily since December 2016. The upheaval stems from the coincidence of two significant events- Fed's long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts. Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.
