Inflation is the new monster that every country is dreading. But there is a difference in the potential damage that inflation can do to the US and other emerging countries.Why ? That is because now the emerging countries are undergoing some fundamental changes that put the emerging countries in different perspective calls for individual actions on the part of each such economies as far as their monetary policies are concerned and how can this can be done..?By not pegging against the US dollar.
US endured the credit crunch, credit crunch affected the economic growth and consequently to relieve the situation ,the monetary policies were eased off in US. At that time the concern was growth and not inflation but now concern has shifted to inflation but still at this stage, in US, it seems like the easing would be stopped i.e.no more rate cuts but it does not make it apparent that the interest rates would be increased.There are two reasons for it ;firstly ,the imminent election and secondly the expectation of the shrinking of the US economy which will help in offsetting the inflationary pressure .As emerging economies like India and China have pegged their currency with US dollar ,this has led to the brewing of high inflationary situation in these countries too.
But ,this time around , Emerging Economies(EE) should react and behave in the manner suitable to their current economic situation.To be more precise-as i mentioned earlier that EE economies are undergoing sea change and so this change should be incorporated in their monetary policies. The internal demand curve in the countries like India and China has shifted rightwards and hence the equilibrium is expected to change and also it implies that the economic development of emerging countries is not only depended on the US and other developed countries but also on their own internal growth and so any measures that affect this growth should take into consideration both the factors. Logically it follows that the countries need to de-peg its currencies to US dollars to have more independence regarding its own interest rate policies.
To elaborate with example - If we take look at the investment in infrastructure , India is expected to invest 500 billion$ through its five year plan (data from Economist) and China along with other oil producing countries are expected to invest in fixed asset majorly .Investments in infrastructure translates into prosperity and lays path for the sustained economic development and the growth does not seem to be slowing down in the EE.While in US there is no major contribution to the infrastructure any time soon in other words it is expected to be flat .Hence, in India the RBI should start tightening the monetary policy regardless of how long US takes to tighten its own and India should smoothen the path of its own economic development.
It will take more than traditional method of pegging currencies to US dollar ,to combat the inflation, by the emerging economies as they have much more to loose by following the US dollar this time.
