Friday 17 May 2013

Liquidity Induced Rallies

Central Banks, the world over, are on a monetary easing mode to spur growth for
their respective economies.    Barring the eurozone, these measures seem to be
yielding results in varying proportions.    US is showing signs of recovery.    In Japan,
Abenomics seems to be working for its economy.    At least, the latest Q1 GDP
number seems to suggest so.

While these monetary easing measures may have spurred growth, the other aspect
of these measures is the conspicuous stock market rallies world over.    US stock markets,
the Nikkei, DAX, Nifty, etc., are trading at their record highs.    In the context of Nifty,
market is rallying on the back of strong FII inflows defying macro economic fundamentals.

The IMF in its latest report on emerging economies cautioned that "financial imbalances
and rising asset prices, fuelled by strong credit growth and easy financing conditions
are building in several Asian economies".    In the event of severe global slowdown,
capital flow reversals and falling external demand would exert a powerful drag on Asia's
most open economies.

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