‘Impossible trinity’ conundrum has caused a cash crunch in Asia
central banks are getting a painful refresher in economic theory. Monetary authorities in China, India and elsewhere have waged a prolonged campaign against the strong dollar, using a mix of official reserves and opaque derivatives trades to defend their currencies. But their moves have pushed up borrowing costs for local banks just when slowing economies need more liquidity.
China’s overnight and seven-day repo rates surged in February, while bond investors took losses from a sharp rise in yields. Banking liquidity in India suffered its highest deficit in at least 14 years earlier this year and overnight borrowing costs jumped. Liquidity also dried up in Indonesia and Malaysia following central bank currency interventions.
These moves are explained by what economists call the impossible trinity, the idea that countries can’t simultaneously control their currencies, independently set interest rates and allow capital to move freely across borders. Something will break or give way.
Bank Liquidity in China and India Has Tightened This Year
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