A crucial week is ahead for the entire financial market fraternity across the globe, as investors will be closely watching the minutes of the US Federal Reserve meeting scheduled for Wednesday and Thursday. The Federal Open Market Committee meeting is important, especially for emerging markets such as India, because it would provide some definitive clue on the timing and downsizing of the Fed’s bond-purchase programme — commonly known as quantitative easing programme.
The new RBI Governor Raghuram Rajan too has deferred his maiden policy review to September 20 to have “enough time to consider all major developments.”
Recently, a few G-20 members also raised their concerns on scaling back of the quantitative easing measures that might have a severe impact on developing countries, which have benefited (mainly Indonesia, India and Brazil) from easy liquidity.
The FOMC’s two-day policy meeting will decide on interest rates in the US. The US central bank currently buys $85 billion a month in US debt and mortgage-backed securities in a bid to hold interest rates low and encourage economic growth. The US Fed’s bond-buying programme has kept global markets flush with liquidity in recent years, as global investors borrowed dollars at low interest rates and invested them in places where returns are high despite economic, social and political risks.
One of the key beneficiaries of such easy monetary policy is India, where foreign institutional investments touched a record high, particularly in the BSE Sensex and Nifty stocks during the current fiscal. Recent studies estimate foreign investors hold about 48 per cent of the market’s free-float capital.
Recently, two biggest and most successful global hedge fund managers have warned investors on India. Jeff Gundlach, who manages DoubleLine Capital LP, believes that India’s currency is weak because of reliance on foreign capital and that he would rather not own Indian stocks. He also said that India’s stock markets look “very scary” because of high oil prices and rupee depreciation.
Similarly, Ray Dalio, who manages $150 billion in assets at Bridgewater Associates, said India should “prepare for the worst” since it has been vulnerable to foreign capital inflows. While the Governments (in emerging markets) are concerned over the withdrawal programme, it seems most market analysts, however, have already reconciled to the fact that the Fed will taper-off its perpetual bond buying.
Many believe that the market has already priced in the possible tightening of US monetary policy.
Of course, any negative surprise on the quantum or timing will have an adverse impact.
“We believe Fed tapering will be modest, we’ve just raised our China GDP forecast and so long as 4 per cent acts as the autumn ceiling for the 30-year Treasury yield, the “bear market rally” in credit and emerging markets can continue to erase some of the painful summer losses,” said Bank of America-Merrill Lynch in its latest report.
Now that the Fed is discussing the end of quantitative easing, one big push factor is gone and capital is flowing out of emerging markets, observed Barclays Global Research.
Emerging markets with lower growth potential, volatile currencies and heightened political uncertainty are more likely to underperform, added Barclays.
Every one hopes that India will manage to avoid this by pulling available fund resources in its favour. Is that too optimistic?