Neo-banking: The latest in a long line of fintech revolutions 26

An ESS is necessary today to give a shielded entry to new equity investors into the stock markets, while also giving them some timebound tax benefits for carving out their savings for equity investing.

Indian stock markets need strong retail participation to mitigate the risk of foreign fund outflows.

The enthusiasm for opening demat accounts is evident, with their number crossing the 100 million mark in the end ofAugust 2022.

It is now important to also induct these retail investors into the stock markets and ensure that their involvement is not stifled due to the volatile market conditions. An ESS at this time will keep the retail investor participation going and will also guide these novice investors from making the wrong investment moves at the start of their equity experience.

Dr. Niti Nandini Chatnani The Economic Times September 17, 2022

Hawkish Federal Reserve rate hikes: Ramifications on Emerging Economies

"When the U.S. sneezes, the world, including emerging markets and developing countries, catches a cold. " When the financial crisis of 2008 hit the world, no market was spared. As the herd behaviour of panic and dread took over, the emerging economic powers crashed in sync with the developed ones.

In 2022, the world appears to be experiencing déjà vu. The Federal Reserve's aggressive endeavour to control inflation in the United States by hiking benchmark interest rates might have long-term negative consequences for developing economies worldwide. The Federal Reserve, led by Jerome Powell, delivered its most aggressive tightening interest rate regime to date, providing a brutal reality check to economists. The estimates are hawkish, intending to raise interest rates until the funds level reaches a terminal rate of 4.6% in 2023, implying a steep quarter-point increase next year with little possibility of a drop. Increasing federal funds rates to a range of 3%-3.25% in an effort to combat inflation, which has reached levels not witnessed since the early 1980s, was followed by a third subsequent 0.75 percentage point increase. History counsels extreme caution and fear as a trip down memory lane to the post World War I years and the orchestrated efforts of the Federal Bank to hike interest rates, which though pushing the economy to reverse recession in the major industrialized countries, let the non-industrialized ones drown in several years of curtailed growth, has left them in a trance today. Another example is developing countries defaulting on debts in the early 1980s as a result of aggressive interest rate hikes to combat inflation. Coming to the present, no one can deny that the developing world is already in a precarious state.

The pandemic and its aftermath, Russia's atrocious invasion of Ukraine, deep debt distress, and other macroeconomic weaknesses have already caused significant economic disruption. In such a situation, the thought of the Federal Reserve entering a full-fledged inflationfighting mode has undoubtedly left many apprehensive about the probable consequences of its actions on growing powers, all thanks to history. Rising interest rates can expose developing countries to vulnerabilities such as increased debt burdens, capital outflows, currency devaluation, and tightening financial conditions (the fundamental cause of a financial crisis). According to the IMF's April 2022 report, the prospect of almost 60% of lowincome developing nations having deep debt or being at risk of experiencing the same is considerable. Indeed, the report specifically noted that such a rapid rise in interest rates in wealthy countries could be the backdrop for diminishing external financial conditions in emerging economies. High-interest rates in the United States can lead to higher rates abroad. Technically quoting another fact-at the end of the day, the working class has to suffer the wrath of such aggressive interest rate hikes, since the same rates mirror the rates imposed by banks on debt instruments, particularly home equity loans and expensive auto financing. Second, the substantial withdrawal from risky assets following a rate hike in the United States often makes emerging economies unappealing, as foreign investors are compelled to pump liquidity out of them. The dollar index causes fear, resulting in "strong buying as a powerful hedge" against interest rate hikes and the inflation cycle. Furthermore, an increase in U.S. interest rates raises the relative returns on dollar assets, strengthening the U.S. currency.

With the dollar strengthening, emerging economies are more likely to face significant outflows of foreign capital. Furthermore, the persistent depreciation of currencies follows the two-decadelong strengthening of the U.S. dollar index in the hope that demand for safe-haven currencies such as the dollar would increase.