Hot Money ....

FIIs touch make emerging economies steaming hot.

Its a problem of plenty for emerging economies like India and Brazil. With ultra low interest rates in the developed nations there is a reverse flight of hot money in emerging economies. It is creating an asset bubble particularly in the equity markets of emerging economies. Emerging economies as an asset class constitutes the biggest proportion of private equity funds, hedge funds and big ticket investors. For an emerging economy like India or Brazil all money is welcome money but with such robust inflows central bankers are in a quandary to avoid bubbles and prevent markets from over heating. Brazil imposed a tax on all FII inflows (2 % or thereabout), India is still scratching its head to find a solution to the problem of excesses. Any interest rate rise at this juncture will further give impetus to FIIs who are facing near zero interest rates in their home countries. It'l be interesting to see how central bank handles the robust inflows while raising interest rates to rein in the threat of inflation. Inflation in consumer goods sector is already in double digits and the full blown effect of weak monsoon will pinch even more in the coming weeks. RBI is now caught between a catfight of its wife (economic growth) and mistress (inflation control). Lets see how RBI balances its marriage and who comes out a winner; the wife or the mistress.