Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1. Israel has a new central bank governor

2. There is more talk about liberalizing deposit rates in China

3. Reserve Bank of India sounded more dovish than some had expected

1. Israel has a new central bank governor. Leonardo Leiderman was named central bank chief, contrary to expectations by many observers who thought that acting Governor Flug would get the nod. Dr. Lederman is chief economist of Bank Hapoalim. He has a Ph.D. from University of Chicago, which we think suggests a very orthodox approach to central bank policy-making. Yet, early signs suggest continuity with Dr. Fischer, as Leiderman stressed that growth is a priority for the central bank. He will still take some time to be confirmed, and may not be in place by the next policy meeting August 26. In the meantime, we believe the central bank will continue to intervene in an effort to offset shekel gains. USD/ILS is trading very near to the year's low around 3.54-3.55.

2. There is more talk about liberalizing deposit rates in China. After the usual back and forth media reports, it seems as if the PBOC has already agreed in principle to a proposal to liberalize 5-year deposits. This would be a small but symbolic step (some estimates suggest that 5-year deposits account for less than 5% of total deposits). The latest idea floated in the media is that the PBOC will set up 3 benchmark lending rates for maturities less than 1-year, 1-year, and 5-years. 

3. Reserve Bank of India sounded more dovish than some had expected. In particular, the central bank noted that the recent tightening measures aimed at supporting the rupee “will be rolled back in a calibrated manner as stability is restored.” This seems perfectly reasonable to us and, in fact, this type of early guidance addresses some of the concerns we had raised about their actions. Still, markets were not happy with the trade off in currency stability for growth, and took the opportunity to send USD/INR to as high as 61.17 before news of a plan to help repatriate money from Indians living abroad started to be discussed. In any case, we still see INR under-performing, even though we think the worst is over and short-term gains are possible if global equity market conditions remain stable.