US Fed may start liquidity injections by June next year: Neelkanth Mishra
US bond yields staying higher for longer, the Federal Reserve may reverse its ongoing quantitative tightening (QT) and resort to liquidity injections by either May or June next year to avert major disruptions in the global financial system, Neelkanth Mishra, chief economist, Axis Bank, said in an interview to Gayatri Nayak and Bhaskar Dutta. Edited excerpts:
What is your view on global liquidity in view of the strong strides towards QT that the Fed has taken? When can we expect any change in the RBI's management of domestic liquidity?
Once the RBI feels comfortable that now the Fed will keep easing for a while, it will allow them to go easier. When that happens is a much tougher question. My sense is the late second quarter of the calendar year 2024. So, maybe a May-June timeframe. By then, we should start to see some stresses showing up. There are some indicators; we have started seeing shortages in dollars outside the US. But for things to reach a point where the Fed is forced to intervene again could be in May or June.
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There are structural factors that are likely to keep US bond yields higher than they were in the past decade. How would that impact capital flows into India and the current account deficit (CAD)?
I think the impact on the CAD may be lower than the impact on capital flows. The problem on a run-rate basis is much greater on the capital flow-side because whenever this happens, the outflows happen — effectively, people are stampeding out. While the full-year
