Global Interest Rates and Emerging Markets

Inflation, capital flows, asset prices, and India VIX

Interest rates are prices of time, risk and liquidity. A policy rate is directly selected by a central bank, but market yields reflect expected future policy, inflation compensation, fiscal supply, term premia and investor risk tolerance. Emerging markets are linked to these prices through trade, portfolio investment, foreign-currency borrowing, commodity pricing and the benchmark role of dollar assets. A change in the Federal Reserve’s expected path can therefore affect local bond curves and exchange rates before the Fed changes its target. The same rate increase can have different effects across countries and across episodes because financing structures, external buffers, institutional credibility and the nature of the shock differ.