Global Monetary Policy and Emerging Markets Outlook: Central Banks Hold Steady as EMs Surge
In a world of uneven inflation, mixed growth signals, and rising political uncertainty, major central banks are expected to move cautiously, with key decisions scheduled for March. At the same time, emerging markets are experiencing a sharp rebound, offering investors compelling growth and diversification opportunities beyond developed economies. This analysis threads together the biggest global developments worth paying attention to, explaining their ripple effects and potential impact on India.
Wait-and-Watch: Central Banks Maintain Cautious Stance
Four key central banks are set to announce monetary policy decisions in March, with policymakers widely anticipated to keep interest rates unchanged. Last week, India left its policy repo rate unchanged as the growth outlook improved, partly due to a potential India-US deal, while inflation is projected to rise above the 4% mid-point target by the first quarter of FY27. In the United States, the Federal Reserve is likely to extend its pause, as inflation remains above the 2% target and economic growth continues to outpace long-term potential, leaving little room for near-term easing. Leadership uncertainty, including the prospect of Kevin Warsh taking over as Federal Reserve chair later this year and concerns over political interference, are expected to reinforce this cautious approach.
The Bank of England, while moving closer to rate cuts, is expected to hold for now as it weighs cooling demand and easing inflation against still-elevated price pressures and a fragile recovery. In the euro zone, the European Central Bank appears comfortably on hold, with inflation below target but growth proving more resilient than feared, and exchange-rate moves largely absorbed into its outlook. However, Japan stands apart, with its central bank expected to maintain a tightening bias, keeping rates steady in March but signaling further increases later in the year as wage growth firms and a weak yen risks adding to inflationary pressures.
EMs Reloaded: Emerging Markets Break Long Streak of Underperformance
Emerging markets are finally breaking their long streak of underperformance, which lasted nearly 20 years despite faster growth than the West. In 2025, the MSCI Emerging Markets Index surged by 34%, significantly outpacing the 21% return of the developed MSCI World Index. This momentum has carried into early 2026, with emerging market shares already up another 9%. Stronger local currencies and higher returns on domestic bonds have added to this momentum, while a weaker US dollar has lowered the cost of dollar-denominated debt and boosted exports. Historically, EM stocks have tended to rally when the dollar weakens, suggesting there may be more room for growth.
Overall, emerging markets remain relatively cheap compared to developed markets and are more resilient than in the past, thanks to stronger institutions, healthier central banks, and better preparation for economic shocks. With the International Monetary Fund predicting these economies will continue to outpace the rich world this year, investors now have a compelling reason to look beyond the MSCI World for growth, diversification, and higher returns.
Growth with Strains: China Hits Target but Faces Domestic Weaknesses
China achieved its 5% growth target again in 2025, but the way it maintained this track record highlights both its strengths and weaknesses. Growth was overwhelmingly driven by exports, which surged despite high US tariffs, pushing the trade surplus to an unprecedented $1.2 trillion. This export engine compensated for a domestic economy that remains stubbornly weak, with households saving more, spending cautiously, and showing little confidence, while the property sector continued to drag investment lower. Beijing's post-property-crisis strategy has been to channel credit and policy support toward factories rather than consumers, deepening overcapacity and forcing producers to seek demand overseas.
While this approach has worked so far, it comes at a rising cost. Trading partners are growing uneasy as Chinese goods flood their markets, raising the risk of retaliation. A relatively weak yuan has amplified this effect, even as authorities have recently allowed the currency to strengthen slightly and offered selective trade concessions. Experts warn that without a stronger push to lift household incomes, repair the property sector, and boost domestic demand, China risks slower growth at home and sharper resistance abroad, threatening its export-heavy model.
Japan Jitters: Bond Yields Spike Amid Fiscal Concerns
Japan's 30-year government bond yield jumped to 3.8% on January 20, the highest level in 25 years, as investors priced in the risk of a snap election that could lead to more fiscal spending. This spike highlights growing concerns over Japan's exceptionally high debt-to-GDP ratio, which exceeds 250%, leaving the government more sensitive to changes in interest rates and fiscal policy. High yields make borrowing more expensive and raise questions about the sustainability of Japan's long-standing fiscal model.
At the same time, Japanese investors remain among the world's largest holders of overseas assets, with financial institutions holding over $6 trillion in foreign securities. To protect this money from currency swings, they used hedging, but this has now become very expensive. With Japanese yields finally rising, some investors may find it simpler and more profitable to repatriate funds and invest domestically. However, the spike proved temporary, and yields have since eased to around 3.6%, reflecting a market recalibration rather than a broader panic.
