The US Federal Reserve may follow a strategy of tapering more on the treasury side than mortgage-backed securities.
Such an approach may not have a direct bearing on the Indian mortgage market, but could indirectly affect it in terms of liquidity and cost of credit, say economists.
What would be crucial is the final aggregate quantum of bond purchases that would be scaled back — whether it be of treasuries or mortgage-backed securities (MBS).
The recent drop in demand for home loans in the US may push the US Fed away from a taper in mortgage bonds, say US economy watchers. Also, MBS purchases are considered to be more effective when compared to purchase of treasuries in terms of stimulating economic activity.
The probability of the Fed maintaining its monthly purchase of MBS at $45 billion or only marginally reducing it is quite high, analysts say.
Mortgage rates have surged to a two-year high in the US and this had also pushed down refinancing by over 70 per cent over the last 12 months, it is pointed out.
No direct impact
It is unlikely that the Fed will do anything to upset the green shoots in its housing market, R.V. Verma, Chairman and Managing Director, National Housing Bank, told Business Line here.
The Fed taper will have no direct impact on the Indian mortgage market, but may indirectly affect it in terms of liquidity in the financial system and cost of credit, he added.
The third round of quantitative easing (QE) recommenced in September 2012 with the purchase of mortgage bonds. Treasuries were later added in December 2012.
While monthly purchase of MBS stood at $ 45 billion, the quantum of purchase of treasuries currently stood at $ 40 billion per month.
The Federal Open Market Committee will conclude its two-day meeting at Washington on Wednesday and decide how much of the monthly bond purchases of $ 85 billion it should reduce as part of its stimulus withdrawal.
A somewhat different viewpoint is that the final choice of instrument or the mix for the stimulus reduction may not be all that material for emerging markets like India.
“What is to be seen is the total quantum of reduction in the pace of bond purchases,” said Jagannadham Thunuguntla, who heads Assocham’s capital market committee. The easy money days are now over and India has to henceforth work hard to get foreign inflows whether it be on debt or equity side, he added.
QE RECAP
The first round of QE started in 2008 when the Fed purchased $1.25 trillion MBS, $300 billion worth treasuries and $175 billion federal agency debt.
In the second round of QE that commenced in November 2012, the Fed bought treasuries worth $600 billion.