India Second in Asia to Attempt an Exit Strategy

Bloomberg There is much talk among traders these days about possible exit strategies of central banks when they become confident enough in their respective economic recoveries to begin removing the excess liquidity that is now driving global stock prices.

India’s central bank has ordered lenders to keep more cash in government bonds, signaling the start of monetary tightening in Asia’s third-largest economy as inflation accelerates. India's central bank added some 5.85 billion ruppes of cash (nearly 9% of GDP) since September 2008 to protect the Indian economy from the global financial crisis. The increase in the liquidity ratio is aimed at draining some of this excess liquidity. according to some analysts, the move points to imminent interest rate action as inflation pressures are building.

India is the second country in the Asia-Pacific region after Australia to initiate an exit strategy. Thus it appears that central banks in the region with healthier economies are now turning their attention to inflation, and to managing the recovery instead of the crisis,including asset price inflation, as strategists are beginning to suggest that the next "bubble" could be in Asia/emerging markets.

Given the strong 8.9% YoY growth in China's Q3 GDP, analysts at Credit Suisse AG and UBS AG, who are among those predicting that China’s authorities will raise banks’ cash reserve requirements as soon as by the end of December, while Morgan Stanley's Stephen Roach insists that China will continue to err on the side of caution (continued stimulus).