)
Stock markets ended firm on Wednesday in a late rally, while the rupee weakened hours before the crucial US Fed meeting, the outcome of which will have a bearing on the extent of flows into emerging market equities including India’s.
Fed chairman Ben Bernanke is expected to announce a partial rollback of the gigantic monetary stimulus package, known as Quantitative Easing (QE) 3, but the focus of investors world-wide is on the degree of the likely tapering that the American central bank may announce.
The broader consensus is that the Fed may cut the monthly bond buying by $10-15 billion out of existing the $85 billion. Market participants believe the market is likely to take kindly to Fed’s decision to stick to a pullback of $10-15 billion a month.
“If it is in-line with expectations, it will be taken positively by the markets and we will see some rally,” said Nick Paulson-Ellis, CEO, Espirito Santo Securities India.
Hopes of Fed restricting the QE3 cuts to what the market expects helped many Asian markets end higher. The MSCI Asia Pacific Index gained 0.4 percent.
BSE’s Sensex gained 158.13 points or 0.80 percent to close at 19,962.16. NSE’s Nifty rose 49.25 points or 0.84 percent to close at 5,899.45. But, majority of the gains was because of a late rally thanks to short-covering.
The mood in currency market was a lot more cautious ahead of the Fed meeting with the rupee unable to hold on to its early gains The rupee ended marginally weak at Rs 63.39 per dollar compared with the previous close of Rs 63.37. The rupee had touched a high of Rs 63.08 after several foreign banks decided to cover up their foreign exchange positions before the Fed meeting
The US Fed Chairman had earlier this year, in May, warned markets of a possible tapering of the US $85-billion bond-purchase programme. The reason for this was the recovery in the US markets which caused foreign flows to reverse from the emerging markets back to the US.
Foreign institutional investors pumped in dollars into the country on Wednesday, net buying shares worth Rs 580 crore, according to provisional data. So far in September, these investors have bought to the tune of over Rs7,000 crore after selling worth about Rs22,000 crore in the preceding three months.
Investors worry a higher-than-expected QE3 rollback by Fed (in excess of $20 billion per month) would spark a sharp sell-off in global stocks and currencies as it would mean they would have lesser money at their disposal to invest in riskier assets including emerging markets.
QE3, which was originally meant to revive the US economy, has been responsible for billions flowing into Indian equities in recent months as investors borrowed cheap money there and invested here.
Analysts said investors would be more interested to gain insight into Fed’s thinking about the road ahead for QE3.
“With tapering largely priced in, a key factor that markets will be watching for will be whether the Fed reduces uncertainty for the path of reducing asset purchases and more importantly, eventual policy rate hikes,” said Abhay Laijawala, managing director and head of research at Deutsche Equities.
The Indian rupee fell by as much as 28% and the equity markets fell by about 12% since May partly because of QE3 tapering concerns.
“Markets have had a lot of time to digest the timeline and the quantum of the tapering. So, the actual reaction may be much more subdued than what it was when the Fed first announced its intention to taper the programme,” said Hitendra Dave, managing director and head of global markets, India at HSBC.
Even if the Fed announces a partial withdrawal of the monetary stimulus, Bernanke might announce that interest rates would continue to remain low.
“Bernanke may state that even after QE is completed, monetary policy will remain highly accommodative and that that a tapering of quantitative easing (QE) is not the same thing as a tightening. This will further limit any negative reaction in the financial markets to the projected tapering,” said Laijawala.
