'Will it or will it not' is the question. Market sentiments world over are in anticipation of the US Fed's stance over pullback of the bond buying program. And Ben Bernanke speech today is expected to outline how much longer the Fed will keep its monetary tap open.
It has been nearly 5 years now since the US central bank brought the lending rates to near zero. This opened the floodgates of cheap money. The stimuli were supposed to help the US economy recover by creating more employment. That has hardly been the case. Drawing flak for inducing cheap money to create asset bubbles, the Fed articulated its target in December 2012. Chief Bernanke resolved to keep interest rate near zero at least until unemployment falls to 6.5%. The unemployment in the US is currently 7.3%. And consumer inflation has yet to cross the Fed's 2% target. Thus if one were to go by the statistics, the US Fed has no reason to unwind its stimuli sooner. But given the proportion of debt crisis the US itself is in, a rational approach to liquidity tightening is in order. Not to mention, the global economy is looking for cues from the US with regard to setting economic imbalances right.
For Indian markets though, there is very little good news in the offing. If the outgoing Fed chief Bernanke chooses to step on the brake before vacating his post, there could be panic in the markets. A sudden and quick pull back of the bond buying program will mean flight of dollars from the country. The rise in interest rates will entice foreign investors to chase safe haven US Treasuries as against emerging market stocks. Besides having an impact on the stock markets it will certainly impact the currency. The already pressurized rupee will come under further pressure if dollars head for the door. Not to mention, India's current account deficit, fiscal deficit, trade deficit and sovereign rating concerns will go back to square one.
Now, since it is not going to be very easy for the US to suck out all the liquidity, the possibility of pullback, if any, being very mild is high. More importantly, it could be very gradual. This too will mean that cheap and short term money will keep finding its way into India.
Thus the Fed's stance, though over hyped does nothing to aggravate or assuage the concerns of Indian investors. India's near term problems are not going away without the government's actions on reforms and policies. The selection of stocks therefore need to be on the basis of those that can tide over the worst rather than those that can benefit from short term speculations.
For Indian residents, the sharp depreciation of the Indian rupee is a big negative. It adds further inflationary pressures and eats into our savings and purchasing power. But as it goes, darkness somewhere means sunlight somewhere else. And this is the case with the rupee as well. The Non-Resident Indians (NRIs) seem to be laughing their way to the bank. For them, a depreciating rupee is a lucrative proposition.
Say an NRI sitting abroad could borrow money at cheaper rates abroad. He could then remit the money to India and thanks to the rupee depreciation he would get more rupees than earlier. In addition, he could enjoy the benefits of relatively high deposit rates in India.
And here is proof that the money is pouring into India. As you may know, Kerala receives the highest NRI remittances in the country. As per Indian Express, the state has received remittances worth Rs 750 bn in just the first five months of the current fiscal. That's a significant jump from Rs 600 bn received during the entire previous fiscal. As per Firstpost, foreign banks have identified this opportunity and are set to provide upfront financing for wealthy NRI clients to place large dollar deposits in India. Possibly, the inflow of dollars will provide temporary relief to India on the current account front. However, the flight of these dollars cannot be ruled out as soon as the exchange rates change course.
Buying interest in power, banking and FMCG heavyweights has kept the key indices in Indian equity markets above the dotted line for most of today's session. The BSE Sensex was trading higher by around 88 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened flat to positive.
It has been nearly 5 years now since the US central bank brought the lending rates to near zero. This opened the floodgates of cheap money. The stimuli were supposed to help the US economy recover by creating more employment. That has hardly been the case. Drawing flak for inducing cheap money to create asset bubbles, the Fed articulated its target in December 2012. Chief Bernanke resolved to keep interest rate near zero at least until unemployment falls to 6.5%. The unemployment in the US is currently 7.3%. And consumer inflation has yet to cross the Fed's 2% target. Thus if one were to go by the statistics, the US Fed has no reason to unwind its stimuli sooner. But given the proportion of debt crisis the US itself is in, a rational approach to liquidity tightening is in order. Not to mention, the global economy is looking for cues from the US with regard to setting economic imbalances right.
For Indian markets though, there is very little good news in the offing. If the outgoing Fed chief Bernanke chooses to step on the brake before vacating his post, there could be panic in the markets. A sudden and quick pull back of the bond buying program will mean flight of dollars from the country. The rise in interest rates will entice foreign investors to chase safe haven US Treasuries as against emerging market stocks. Besides having an impact on the stock markets it will certainly impact the currency. The already pressurized rupee will come under further pressure if dollars head for the door. Not to mention, India's current account deficit, fiscal deficit, trade deficit and sovereign rating concerns will go back to square one.
Now, since it is not going to be very easy for the US to suck out all the liquidity, the possibility of pullback, if any, being very mild is high. More importantly, it could be very gradual. This too will mean that cheap and short term money will keep finding its way into India.
Thus the Fed's stance, though over hyped does nothing to aggravate or assuage the concerns of Indian investors. India's near term problems are not going away without the government's actions on reforms and policies. The selection of stocks therefore need to be on the basis of those that can tide over the worst rather than those that can benefit from short term speculations.
For Indian residents, the sharp depreciation of the Indian rupee is a big negative. It adds further inflationary pressures and eats into our savings and purchasing power. But as it goes, darkness somewhere means sunlight somewhere else. And this is the case with the rupee as well. The Non-Resident Indians (NRIs) seem to be laughing their way to the bank. For them, a depreciating rupee is a lucrative proposition.
Say an NRI sitting abroad could borrow money at cheaper rates abroad. He could then remit the money to India and thanks to the rupee depreciation he would get more rupees than earlier. In addition, he could enjoy the benefits of relatively high deposit rates in India.
And here is proof that the money is pouring into India. As you may know, Kerala receives the highest NRI remittances in the country. As per Indian Express, the state has received remittances worth Rs 750 bn in just the first five months of the current fiscal. That's a significant jump from Rs 600 bn received during the entire previous fiscal. As per Firstpost, foreign banks have identified this opportunity and are set to provide upfront financing for wealthy NRI clients to place large dollar deposits in India. Possibly, the inflow of dollars will provide temporary relief to India on the current account front. However, the flight of these dollars cannot be ruled out as soon as the exchange rates change course.
Buying interest in power, banking and FMCG heavyweights has kept the key indices in Indian equity markets above the dotted line for most of today's session. The BSE Sensex was trading higher by around 88 points at the time of writing. Key indices in Asia closed a mixed bag today while Europe has opened flat to positive.
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