The Indian economy is expected to feel some ripples of the massive bond buying programme of the US Government, although it is far from being an immediate beneficiary of QE2, said analysts.
The US Federal Reserve's $600 billion bond buying programme (Quantitative Easing 2) came to end on Thursday leaving the global markets green. The domestic benchmark indices were up by 0.8 per cent as were the US and European markets.
The biggest impact of the QE2 has been on commodity prices to the extent that they are expected to fall. The reason for this being that the excess liquidity that was pumped into these sectors may get reduced, thereby having a sobering effect on commodities, say analysts. Most of the global commodity indices on Thursday declined.
“The decline in commodity prices is positive for India because we spend a lot on import of crude oil and fertiliser and fertiliser inputs. Since the import bill is linked to the fiscal deficit, to that extent the drop in the commodity prices would help in easing the fiscal deficit,” said Mr Chokkalingam G, Executive Director – Chief Investment Officer, Centrum Wealth Management.
While temporary resolution of the euro zone crisis also propped up markets, the impact of the end of QE2 on the markets cannot be ignored, say analysts.
Another consequence of QE2 was the excess liquidity in the global markets. The money released through this was supposed to have found its way into the emerging market economies. “However, increasing prices, rising interest rates, inflationary pressures and corruption allegations in the country led to a lot of FIIs moving out of the emerging markets. In my opinion, QE2 has had more of a negative impact in that sense on the emerging markets,” said Mr Kishor Ostwal, Chairman and Managing Director, CNI Research.
There are rumours of an impending QE3 among market men. While the US Federal Reserve has given no indications of another quantitative easing being on the cards, experts believe that one might be planned ahead of the US elections. “Since QE2 had limited impact on the economy, QE3 may be required to prop up the US economy, which might be announced a few months before the scheduled elections,” said a market expert.