Inflation has remained high, and for most of 2020 out of the RBI’s target zone of 6 per cent. In February, the CPI inflation came at 5.03 per cent, rising for the first time in three months. A rising inflation will force the RBI to tighten its liquidity and rate stance. If the US yields rise, this could lead to outflow of capital, which would prompt the central bank to hike its own interest rate to maintain parity.
In 2013, US yields leaped after the US Federal Reserve
indicated it would begin unwinding its quantitative easing program. The resulting panic over rising credit costs led to sharp outflow from emerging markets, including Asia's, and forced central banks to hike interest rates, S&P
A similar trend could be seen now, as the US yields rise in response to hopes that better economic growth will lift inflation.
“Asia is usually a prime beneficiary of improving global growth. We also believe that Asian economies are better cushioned against external shocks than during the taper tantrum of 2013. Initial conditions are bolstered by current account surpluses, low inflation (for the most part), higher real interest rates, and fatter foreign-exchange reserve buffers,” S&P
"The recovery across Asia's emerging economies should withstand rising U.S. yields so long as this reflects an improving growth outlook and reflation rather than a monetary shock," said Shaun Roache, Asia-Pacific Chief Economist at S&P Global Ratings.
However, if the markets
decided the US Fed underestimated inflation risk, and would need to hike policy rates to combat the threat, then Asia's recovery could be endangered.
"The U.S. treasury market remains important for financial conditions in Asia. Markets
can react in a non-linear way if yields rise very quickly, especially if real yields (rather than inflation expectations) jump and the U.S. dollar appreciates at the same time," said Roache.
If that happens, it would be challenging for both India and the Philippines, S&P noted.
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