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At Princeton University, Professor Ben S. Bernanke often strongly argued that the monetarist policy response could surely be reduction of interest rates to zero – Bank of Japan’s applied method for reflation. “We have the keys to printing press, and we are not afraid to use them”, were his precise words.

Last week, many on Wall Street (on Dalal Street as well) were expecting a repeat of “Greenspan Put” from the FOMC amid a quake in the global financial markets. But in his new avatar as the current Fed chief, Mr Bernanke demurred. Maybe, the writing on the wall is changing.

As FOMC decided to leave the rates unchanged, Wall Street went into a tailspin (52-week high volatility on last Friday) and finished the week in a pool of red. A liquidity squeeze, large-scale losses on speculative unwinding, foreclosures and bankruptcies hit more global credit market players.

Coined in 1998, after Fed cut interest rates following the collapse of investment firm Long-Term Capital Management as an extension of Asian crisis fallout, the term Greenspan Put had come to represent, in Wall Street’s parlance, manipulation of the monetary policy for maintaining market stability as if there was a built-in put option available (for liquidating stocks at a set price at or before a future date).

Monetary authorities in the developed world seemed to indicate this time around that the investors must pay for their misadventures even as they pumped in money to ease a short-term crunch.

The Fed added a larger-than-normal $24 billion in temporary reserves to the banking system. It noted that “in the current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets”. European Central Bank pumped in its biggest ever short-term credit worth $213 billion in two days into the euro zone money market, while Bank of Japan released $8.39 billion. Others such as the Reserve Bank of Australia and the Bank of Canada followed suit. Though the operations by the central banks were larger than usual, analysts did not term the moves as emergency liquidity injection, but focused on the overnight rates.

Global equities markets, however, are beginning to unlearn ways they have been used to, albeit at a cost. Some economists saw signs of not-too-distant recession as the Fed on Tuesday acknowledged that “downside risks to (the US economic) growth have increased somewhat”.

For Dalal Street, the present global financial markets turmoil has undoubtedly jolted the momentum in the short-term over dip in sentiment and liquidity. But it is more of a response to the external realities than internal fundamentals.

According to investment strategists, risk perception remaining unchanged for local equities, a temporary and tactical withdrawal of liquidity prompted by caution is largely at play. But as valuations become increasingly compelling, fresh investments might be difficult to resist.

This week the local indices may to continue to be influenced by the global developments. But as long as the underlying economy does not throw up negative surprises, a broad sell-off may not happen.

More Stories on : Stock Markets | Outlook | Credit Market | A Ringside View

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