Global liquidity infusion may fuel commodity prices: India

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India today said huge liquidity infusion by the US and Europe into the financial system could result in increased investments into developing countries though there are concerns these might also fuel commodity prices.

“There are pluses and minuses. The immediate concern is that if so much liquidity is injected into the system, it might lead to elevated prices, especially in commodities.

It might lead to increased speculation in commodities, crude oil, wheat, cotton, metals,” Finance Minister P. Chidambaram said.

The Minister said this when asked about the impact of liquidity infusion by developed countries at a press conference on the sidelines of IMF-World Bank meetings.

On the positive side, Chidambaram said the money being injected by the US, Euro Zone countries and Japan, would also benefit developing countries which require investments.

“The other side of it is that if so much liquidity is injected...some of that liquidity will find its way to the developing countries as money in either FDI or FII and that is the money we require for our own investment needs.

“One has to make a call after few months...I think there are pluses and minuses, but I hope that the pluses will outweigh the minuses,” he said.

Referring to steps taken by developing countries to easy money supply, he said it was too early to say whether the monetary policy was “right or wrong“.

He further said infusion of huge liquidity may lead to increase in commodity prices in dollar terms, but may not have the same impact in terms of local currencies.

“(Its) possible that prices may be elevated in the dollar terms but it may not be elevated in the terms of local currency. It’s too early to say anything definitely. But it has not led to appreciation of all currencies,” the Finance Minister added.

(This article was published on October 11, 2012)
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