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Indian financial market to benefit as US Fed keeps stimulus unchanged

Zero tapering by the Fed will be soothing some nerves at Reserve Bank of India (RBI). On Friday, new RBI governor Raghuram Rajan will come out with his maiden policy and any tapering would have put pressure to further tighten interest rates to protect the rupee.

twitter-logoMahesh Nayak | September 19, 2013 | Updated 11:18 IST
Indian financial market to rise on zero taper by US Fed

Late last night the US Federal Reserve said no to taper and decided to maintain its bond buying program of $85 billion per month. This has come as a sweet surprise as markets across the globe with expectations that the Fed would taper quantitative easing (QE), as the program to pump in money cheaply into a battered economy is called, by $10-15 billion a month.

The reason for not tapering the QE was it felt that the unemployment rate in the US is still high. Though the unemployment rate in US has come down from 8.1 per cent in June 2013 to 7.3 per cent in August, it is still higher than expectation. In fact, the US Fed is not expected to hike rates until the jobless rate does not come below 6.5 per cent.

In India, the news of the zero taper was greeted positively with equity markets rising sharply on early trades Thursday. The benchmark BSE Sensex was up 2.61 per cent, or 520 points, at 10.55 am.*

However, in the long term, the Fed decision doesn't make much difference to India. In the last four years and nine months since QE started in the US on 25 November 2008 till date, the Fed has pumped slightly over $3 trillion to boost its battered economy. In the same period, close to $105 billion foreign institutional investors (FIIs) inflows came into the Indian equity and debt market. Even if one assumes that the entire FII inflows into India came from US, it this will not be over 3.5 per cent of the overall infusion of money by the Fed.*

Even if the US had tapered the QE, the quantum of fund flows into India would not have come down by much. In fact, even the possibility of a QE taper had already been factored into the market valuations in India, analysts said.*

For India, slow growth and not QE tapering is going to have a huge impact on fund flows. A GDP growth of 4.5-5 per cent isn't good enough to pull flows into the country and if the flows have to be maintained India has to grow above 6.5-7 per cent. Though government has acted late it has signalled it means business with it clearing several projects as well as giving approval to key economic legislation.

With the recent correction fund managers purely on valuations have turned positive on Indian equities. Sandeep Shenoy, Executive Director-Institutional Equities at Anand Rathi Securities had said ahead of the Fed decision: "Most of the bad news (even the tapering of the QE) is already being factored in the price and things look much better than before. But will I be a buyer across the board? The answer is no. I will stick to value and pick stocks of companies that are generating positive cash flows."

Meanwhile, zero tapering by the Fed will be soothing some nerves at Reserve Bank of India (RBI). On Friday, new RBI governor Raghuram Rajan will come out with his maiden policy and any tapering would have put pressure to further tighten interest rates to protect the rupee. However with the tapering being postponed, RBI can take its chance to cut rates for boosting growth. It will be interesting to see if Rajan bites the bullet.

(*: Copy updated to reflect Indian equity market trades early Thursday.)

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