The probability of the US Fed aggressively rolling back its easy-money policy by lowering its monthly pace of bond purchases appears low.
Few policymakers and capital market observers think the US Fed will significantly scale back its bond purchases that have been pumping about $85 billion into the market every month.
This could mean there will not be any significant reduction in the amount of money the US central bank pumps into the financial system each month. “My expectation is Fed tapering will at best be around $15 billion each month. This would mean the monthly purchase would slow to about $70 billion from the current $85 billion,” Jagannadham Thunuguntla, Head of Research, SMC Global Securities Ltd, told
The chances of aggressive tapering are dim as it may further affect the tepid US economy, he said.
The US quantitative easing (QE) decision after the Federal Open Markets Committee meeting on September 17-18 will have a significant bearing on RBI Governor Raghuram Rajan’s actions for his monetary policy review on Friday.
The strong probability, Thunuguntla said, is the RBI maintaining status quo — no change in policy rates or dilution of the tightening process.
Shubhada Rao, Senior Director and Chief Economist, YES Bank, said there was little chance of the US Fed coming up with any big-bang announcement on the QE tapering. It is likely to be a gradual and calibrated measure, she added.
C. Rangarajan, Chairman to the Prime Minister’s Economic Advisory Council, said the impact of likely tapering has already been factored in by the Indian market.
“The timing is going to be difficult for them. But their direction (of the US Fed) has already been made clear,” he added.
The lowered expectation in the size of the cuts in bond purchases could augur well for emerging markets, such as India.
US Fed policymakers are meeting in Washington on September 17-18 to take the first step towards reducing the stimulus, which was supplied to help revive the US economy in the aftermath of the global financial crisis in 2008.
The US Fed has kept its benchmark rate near zero since December 2008. It has till date embarked on three rounds of QE to support the economy.
Many critics see the US Fed’s QE programme over the last three years as a form of financial repression — savers paying for the rescue of the banking system.