The cash crunch in Asia has been exacerbated by the impossible trinity concept in economics, which asserts that a nation cannot simultaneously manage its currency, set independent interest rates, and allow free cross-border capital movement. This tension creates an unsustainable situation. Given the tightening liquidity in regions like China and India, banks are discouraged from lending, threatening economic growth.
Interbank rates are rising, signalling cash shortages threatening wider economic stability. Investors in emerging markets face a dilemma; a weakened currency depreciates the value of investments while measures to stabilize may hinder growth, undermining the investment framework.
In response to the liquidity crisis, the Reserve Bank of India has committed to injecting $21.5 billion into the system through bond acquisitions and swap auctions before the fiscal year’s end. On the contrary, the People’s Bank of China has yet to follow suit, even as financial conditions tighten, despite a projected growth target that may necessitate easing.
Market players are preparing for fluctuating conditions influenced by the unpredictable trade policies of US President Donald Trump. Central banks might face challenges addressing currency stability while managing liquidity stress simultaneously. “The currency volatility could continue amid ongoing global trade and tariff wars,” warned Madhavi Arora, highlighting the vigilance required from central banks like the RBI.
Economists predict the Indian rupee may depreciate to 89.50 against the dollar by year-end, emphasising the expected pressure on emerging currencies globally. Other nations like Indonesia are experimenting with novel financial instruments to attract capital, though this approach has inadvertently tightened liquidity, as noted by Goldman Sachs.
In Malaysia, the central bank is utilising currency forwards to uphold the ringgit’s value, yet this strategy has contributed to increased interbank liquidity constraints. The global scenario poses an ironic twist; the burdens associated with a strengthening dollar have prompted speculation about a potential accord that might advocate for dollar weakness, a relief for cash-strapped Asian central banks grappling with its impact.
The article discusses the cash crunch in Asia driven by the impossible trinity, where countries can’t manage currency, interest rates, and free capital movement simultaneously. Rising interbank rates signal a liquidity crisis, threatening economic growth. Central banks like the Reserve Bank of India are implementing measures to alleviate cash shortages, while uncertainty looms over currency stability as they face challenges from rising US trade policies.
In summary, Asia is grappling with a severe cash crunch rooted in the conflicting demands of the impossible trinity. As central banks like India’s take active measures to infuse liquidity, challenges persist amid fears of currency depreciation. Investors in emerging markets must navigate the instability brought about by geopolitical factors and central bank strategies, indicating a turbulent year ahead for Asian economies.
Original Source: m.economictimes.com
