All eyes across the world are now set on the US Federal Reserve (FED) Monetary policy, scheduled on Sep 18, 2013. It is expected that the recent good set of economic data points like employment and industrial growth will prompt FED to lay the road map for possible gradual reduction in monthly purchase of the financial assets. FED has already hinted in May 2013 that, if, current growth momentum is maintained, then they may consider withdrawing exceptional liquidity provided since 2008 to help support the US economy after financial crisis. In fact, emerging countries are so paranoid about "Tapering" that, they were urging FED to considering its implication on them in the latest G20 conclave, should they decide to go for it. However, in all likeliness, should they consider it, is any body's guess.
Globally financial markets have already started pricing in such event from May 2013. Yield have gone up for "Fragile Five" countries like India, Turkey, Indonesia, South Africa and Brazil. Most of these countries are running large Current Account Deficit (CAD), which has attracted the attention of investors, off late, and they choose to walk out. This has led to sharp fall in the nominal value of the currencies of these countries against USD side by side. This problem is further complicated as they have limited foreign exchange reserve to defend the local currencies. India has announced host of measures, which include attracting funds from Non Resident Indians (NRIs), easing rules to attract flows in both debt and equities etc. These measures, at the best, will provide breathing space to policymakers to come out with structural reforms to improve quality of foreign exchange inflow in the coming years.
Going forward, movement in interest rate & foreign exchange value of the developed world will decide the course of various Indian asset class. why is it so.. Well, India was one of the major beneficiary of the global liquidity unleashed during 2008- 2012. Unfortunately, we are not ready, once stage is set for withdrawal. Our complacency that "All is Well" is taken the toll of growth in India. Though warning signs were there in terms of persisting high Inflation, increasing CAD & Trade Deficit, ever increasing growth of non productive imports ( Gold, consumer goods etc.), high corruption and anemic export growth. Yet our policymakers had wished away that good times may continue due to external financing. This time the problem is "Made in India".
If FED decide to onset reduction in purchase program, then obviously interest rates will further inch up in developed world. This could adversely impact the emerging countries including India, which is already facing the heat in financial markets in terms of recent fall in the value of currency, higher interest rate and low interest in equities.
Well, let us wait till then & look forward that policymakers should be ready to contain any adverse fall out.
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