QE cut signals drag global markets

Global markets tumbled on Thursday after minutes of the rate-setting US Federal Reserve’s committee meeting showed some American central bank officials had raised concerns over its loose monetary policy. India’s benchmark indices posted their biggest intra-day fall since May 2012, while local gold prices firmed a little on worries a Fed move to reduce stimulus would cause a decline in fund inflows from foreign institutional investor (FIIs) into risky assets like emerging markets. A decline in FII money coming into the Indian markets over the past three days also heightened caution.

The MSCI Emerging Markets Index slid 1.4 per cent, while BSE’s Sensex dropped 317.39 points, or 1.62 per cent, to 19,325.36. NSE’s Nifty declined 90.80 points, or 1.53 per cent, to 5,852.25.

“The stock market decline was because of nervous sentiments due to some talk of QE reduction,” said Dalton Capital India MD U R Bhat. “If a monetary tightening happens, FII inflows into India will certainly come down,” he said. (COLLECTIVE COLLAPSE)

Though provisional figures suggest FIIs net-bought shares worth Rs 1,213.57 crore on Thursday, brokers said a drop in the pace of inflows over the week had raised concerns whether their purchases were waning. So far in 2013, FIIs have already poured Rs 43,854.50 crore ($8.14 billion) into Indian equities after buying to the tune of Rs 128,359 crore ($24 billion).

The rupee, too, weakened on Thursday — down 41 paise to 54.48 a dollar — following the decline in stock markets and a lower dollar supply due to a nationwide strike at public sector banks. The currency might weaken further from its current levels and soon touch 55 per dollar, amid dollar demand from oil and gold importers, dealers said.

The minutes of Fed’s January policy meeting yesterday revealed worries among some officials that its current monetary stimulus programme - Quantitative Easing - could lead to an instability in financial markets. Some Fed officials said the central bank should moderate the pace of the bond-buying programme to prevent inflation, while others argued the easing was needed until the job market improved.

“This cannot be done in a great hurry. QE is likely to continue for at least a year because the US is still not out of the woods,” said Bhat.

Gold closed the day marginally higher, at $1,570 an oz after falling 2.6 per cent in the previous session to an eight-month low. The mild optimism in gold did not rub-off on silver, which dropped 0.1 per cent to $28.49 an oz. Yesterday, the white metal had hit a six-month low of $28.26.

Brokers said all eyes are on the Union Budget next week. Its outcome could set the tone for the markets. “Our view is that the Budget would reaffirm the path of fiscal consolidation and, therefore, a reduction in current account deficit. This favours equities,” said Morgan Stanley’s analysts, led by Ridham Desai, in a note to clients.