Emerging-market outflows seem to be the subject du jour, with the declines in the Indian and Indonesian stock markets and the fall in INR being the triggers for the reporting. But the FT points out that Brazil has also intervened several times in the currency market since May. It sees a general phenomenon of outflows from EM, as a result of tapering talk and the Chinese slowdown.

Why should tapering precipitate outflows from emerging markets? One might say that it is because QE has been driving inflows into emerging markets, and the closer we get to its end, the more markets will fear a reversal of that trend. But, actually, US equities have been stronger than EM equities for a while. USD/BRL has been strengthening since the end of 2011, and Brazil has not really accumulated FX reserves since May 2012. So it does not seem reasonable to say that, in Brazil at least, the end of tapering is a concern because it would mean the end of a capital-inflow-driven boom.

Is it that tapering is seen as a policy mistake? I think it is, broadly speaking, but the markets do not: equity markets remain high even though bond yields and real interest rates have risen since April 2013. In other words, the US markets are pricing an end to extraordinary monetary policy that occurs because the economy recovery can continue on its own.

And, anyway, the Brazilian stock market has gone up since the start of July, while the Indian market briefly rose and then dropped sharply back following the INR fall and the start of the central bank’s intervention.

So it seems much more reasonable to see what is happening in India and Indonesia in country-specific terms.

There is a tendency in the reporting at present to see tapering as being behind every development in the financial markets. Perhaps the fact that the decline in INR occurred after tapering talk had begun is mere coincidence. Perhaps India’s budget problems and economic slowdown are the more pertinent explanations.


  • Japan trade deficit widened, undoing what appeared to be a narrowing trend.