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The world's attention will be focused on central banks, including India, as they decide how to respond to various issues at hand

An interesting trend is underway in the actions undertaken by global central banks. While on one side central banks of many developed economies like the US Federal Reserve, Bank of England and European Central Bank have been hiking interest rates, the central banks of many developing economies like Brazil and China are trimming policy interest rates. This trend has been termed as monetary policy decoupling by many.

Currently, the US Federal Reserve, Bank of England and European Central Bank are busy focusing on hiking interest rates to tame inflation, which is reigning at multi-decade highs. Consequently, interest rates in these geographies are at levels not seen in years. However, this tightening of monetary policy is squeezing global economic growth. As a result, there is a lot of uncertainty about when the central banks of these developed economies will end their policy tightening cycle.

From emerging markets’ standpoint an important question that arises is what will happen when policy rates in developed central banks pivot? When interest rates in developed economies fall, funds find their way into emerging markets. To remind you, policy rates in the developed markets have a bearing on developing economies on various fronts.

The primary impact is seen in the capital flows from developed markets to developing markets. Currently, interest rates in the US and Europe are high and foreign investors have preferred to invest in their domestic markets instead of diverting funds to emerging markets like China and India.

It is only in the last few months that foreign investors are hunting opportunities in hordes outside the US on hopes that the US Fed rate would reverse from high levels. This implies that when the trend changes, the expectation of returns from emerging markets including India will also change.