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The legacy of ultra-loose policy: money supply, central bank balance sheets, and debt remain elevated

The global monetary landscape is entering a different phase. For much of the past decade, and especially during the pandemic, the major economies were supported by very low policy rates, abundant liquidity, large central bank balance sheets, and inexpensive financing. Aggressive monetary easing was accompanied by substantial fiscal support and a rapid expansion in money supply and credit. These measures helped cushion the post-pandemic economy, but they also created a legacy of much larger monetary stocks, central bank reserves, and government debt. As inflation subsequently rose well above central bank comfort zones, the policy framework had to change. What is now emerging is therefore broader than an isolated series of rate increases: it represents the normalization of an exceptionally loose monetary and financial regime.

* The scale of this legacy can be seen in the underlying monetary aggregates. Money supply remains very large, central bank balance sheets remain elevated relative to pre-COVID levels, public debt has increased materially, and currency in circulation and bank deposits has expanded over the past several years. At the same time, inflation remains above target in a number of major economies. The US has federal debt of around 101% of GDP and a fiscal deficit close to 6% of GDP, while Europe and Japan also carry elevated public debt burdens. Taken together, large money stocks, persistent inflation, sizeable fiscal deficits, high government debt, and large central bank balance sheets make a return to the exceptionally cheap financing environment of the previous decade increasingly difficult.

* Broad money remains substantially above pre-Covid levels in most major economies. By CY26’YTD, broad money had increased to USD23.2t in the US from USD15.5t in CY19 (+49.7%), USD52.5t in China from USD28.3t (+85.5%), USD20.3t in the Euro Area from USD14.6t (+39.0%), USD4.4t in the UK from USD3.3t (+33.3%), and USD3.5t in India from USD2.3t (+52.2%). Japan is the exception, with broad money declining to USD10.1t from USD12.6t (-19.8%).

* The same pattern is visible in central bank balance sheets: By CY26’YTD, the Fed's balance sheet stood at around USD6.7t, 61.6% above CY19, while the RBI's was USD1.0t, 61.9% above, the PBoC's USD7.4t, 40.5% above, the ECB's USD6.9t, 31.4% above, and the BoE's USD1.0t, 43.5% above. Although balance sheets have declined materially from their pandemic peaks, they remain structurally larger than before Covid in most major economies. This does not imply that the policy is currently loose, but highlights the large monetary footprint left by the pandemic-era easing. With inflation still elevated and public debt much higher, the policy regime is now moving from abundant and inexpensive liquidity toward tighter and more expensive capital.

Global central banks have shifted from easing to tightening

* The shift is now visible in the actions of major central banks. The US Federal Reserve delivered a 25bp rate hike on September 16, taking the federal funds target range to 3.75–4.00% in a unanimous 12–0 decision—its first hike since July 2023. The ECB raised rates by 25bp in September, taking its deposit rate to 2.50%, as inflation risks remained elevated. The Bank of England held Bank Rate at 3.75% on September 17, but the 6–3 vote was notably hawkish, with three MPC members preferring a 25bp hike to 4.0%. The BoE also continues to reduce its government-bond holdings through quantitative tightening. The Bank of Japan raised its policy rate by 25bp to 1.25% (31-year high) on September 18, continuing its gradual exit from the ultra-low-rate regime.

* China remains the key exception, with the PBoC maintaining an accommodative stance to support domestic demand. The global picture is, therefore, not one of synchronized tightening, but rather a broad repricing of financial conditions, with higher policy rates at the short end, elevated government-bond yields at the long end, and less abundant marginal liquidity.

Global bond yields have moved sharply higher

* The shift toward tighter monetary policy is increasingly visible in global bond markets, with 10-year government-bond yields at multi-year highs across major economies. The US 10-year Treasury yield briefly crossed 5.0%, touching 5.04% on September 15, its highest level since 2007, before easing to around 4.93% on September 18. The UK 10-year gilt yield has been around 5.35–5.40%, while Japan's 10-year JGB yield has risen to around 3.0%, its highest level in three decades; the 10-year India G-sec yield has moved above 7.0%, reaching 7.05% on September 17.

* The rise in yields reflects more than just higher policy rates: persistent inflation, elevated oil prices, large fiscal deficits, heavy government-bond issuance, and a higher term premium are all contributing to the global bond sell-off. The US 10-year yield is particularly important as the global risk-free benchmark, raising discount rates for equities and increasing borrowing costs across economies. For India, the move above 7% in the 10-year G-sec means that financial conditions are tightening even before a formal RBI repo-rate hike, with higher global yields transmitting through domestic bond markets, the rupee, and the cost of capital.

The impact across sectors will be uneven

* Banks should initially be relatively better positioned than NBFCs, as floating-rate assets can reprice and stronger deposit franchises can provide some protection from higher funding costs. NBFCs have greater exposure to wholesale funding and refinancing conditions. Real estate, autos, consumer durables, and highly leveraged businesses are more exposed to higher rates, while rural consumption faces an additional challenge from food inflation and weaker purchasing power. Export-oriented businesses such as IT and pharma receive some support from a weaker rupee, although IT also remains exposed to slower global technology spending.

* The broader market implication is that capital is becoming more expensive after an unusually long period of exceptionally low funding costs. The adjustment will differ across economies and asset classes. Economies with stronger external positions, positive real rates, and healthier debt dynamics may have greater policy flexibility, while highly leveraged economies remain more sensitive to higher term premia and refinancing costs. Within equities, the cycle should increasingly separate businesses according to balance sheet strength, refinancing dependence, pricing power, and exposure to discretionary demand.

* Our core thesis is that the global rate hike cycle reflects less a need for dramatically tighter monetary policy and more the growing difficulty of sustaining the extraordinary monetary and fiscal accommodation of recent years. Very large money stocks, elevated inflation, high government debt, sizeable central bank balance sheets, and rising financing costs are together moving the global economy away from an era of abundant and inexpensive capital toward a period of tighter and more expensive money.

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