Markets take Fed taper in stride
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Mumbai: The rupee touched its lowest level against the dollar in two weeks in intra-day trading and the benchmark stock exchange index fell the most in a week after the US Federal Reserve (Fed) said it would cut monthly bond purchases by $10 billion.
But analysts said the impact was bound to be short-lived because the Fed’s monetary taper signals a faster recovery in the US economy.
Indeed, while Indian stocks ended in the red after recovering a bit from their intra-day lows, the bond market rally continued and the local currency ended the day nearly unchanged.
“This is good news. It means that the US economy is actually improving and, being an engine of global growth, (this) will impact all markets favourably,” Varun Goel, head of the portfolio management service practice at Karvy Stock Broking Ltd, said about the Fed’s decision.
India was one of the few Asian equity markets on Thursday that reacted negatively to the announcement overnight on Wednesday that starting in January the US central bank would reduce its bond purchases to $75 billion a month from the $85 billion it spends now.
The Fed cited an improvement in the world’s biggest economy in announcing the tapering of its stimulus programme.
“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bloomberg quoted Fed chairman Ben Bernanke as saying at a press conference in Washington on Wednesday after a meeting of the Federal Open Market Committee.
Most of the key global markets were resilient to the Fed announcement. In Asia, Japan’s Nikkei rose 1.74%, Korea’s benchmark index Kospi ended up 0.05%, Taiwan’s Taiex index added 0.7%, and Singapore’s Straits Times index was up 0.28%.
Although an announcement of the tapering in bond buying by the Fed had been expected, signals of a faster US economic recovery sparked fears of a diversion of foreign inflows from emerging markets to the US.
Finance minister P. Chidambaram said on Thursday that the markets had already factored in the decisions of the Fed. To highlight that the government and the Reserve Bank of India (RBI) are working together, Chidambaram said he has already spoken to central bank governor Raghuram Rajan on the issue.
“India is better prepared than it was months ago to deal with the Federal Reserve’s reduction of its monetary stimulus,” he added.
The negative reaction in equity markets is likely temporary, said analysts. “Fed’s tapering decision was expected for a long time now and hence the disruption it may cause is likely to be fairly modest. This is also because Bernanke had first announced Fed’s tapering more than six months back, and since then the current account deficit and FII (foreign institutional investor) inflows have improved substantially,” said Saurabh Mukherjea, head of research at Ambit Capital Pvt. Ltd.
A Bank of America-Merrill Lynch report mentioned on Thursday that the US recovery should be positive for India and the rest of the world in the medium term.
“...there are three ways in which a US recovery supports India—higher US growth should push up export demand to narrow the current account deficit and spur growth; withdrawal of US easing will likely stabilize oil and other commodity prices and also help narrow the current account deficit; and stable oil prices should also help contain ‘imported’ inflation pressures,” the report said.
Another report by domestic financial services firm Religare Securities Ltd seconded that view. “The start of the Fed taper is a sentiment-positive for the markets, especially on the positive growth outlook in the US. We maintain our ‘global over local’ stance which has remained our portfolio positioning for two quarters now.”
Software and information technology (IT) stocks, however, gained on the Fed announcement on hopes that a faster US recovery will boost exports to their biggest foreign market. BSE’s IT index hit its all-time high on Thursday, rising as much as 2.53%. The index eventually closed 1.74% up and was the biggest gainer among sectoral indices.
The BSE Bankex was the biggest loser, falling 2.43%.
The Bank of America-Merrill Lynch report, however, expected the rupee to see some volatility in the short run if the markets panic about shrinking liquidity, given India’s inadequate import cover of seven-and-a-half to eight months.
The mild reaction of the local currency was an indication that Indian markets had already factored in the Fed’s decision.
The rupee recovered all its losses against the US currency on dollar sales by state-owned and foreign banks through the day.
Foreign banks sold dollars on behalf of their clients and state-owned banks, likely on behalf of RBI to prevent the rupee from falling sharply.
The domestic currency ended at 62.1162 per dollar, little changed from Wednesday’s close of 62.1050. It opened at 62.26 and touched a low of 62.48 as the Fed’s statement overnight forced banks and investors to buy back dollars.
“There were capital inflows and even exporters were selling. The view is that India is much better prepared in dealing with the Fed pull-out than before. I would expect the rupee to trade in the 61.50-63.50 range,” Gupta said.
The benchmark 10-year bond ended at 8.74%, down 4 basis points from the previous close of 8.78%, as prices rose. A basis point is one-hundredth of a percentage point.
Bond yields are at two-week lows after RBI governor Rajan chose to keep interest rates unchanged at its mid-quarter monetary policy review on Wednesday.
Overseas investors are net buyers of more than $18 billion worth of Indian shares so far this year, the biggest in emerging markets in Asia.