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Shashi Ashiwal

Tough task: Dealers at a Mumbai brokerage negotiating the roller-coaster market. –

For the financial market historians, September 18 was a redefining moment. Much before the US Fed’s short-term measures to fend off the credit crisis last month was taken, Mr Stephen Roach, economist of Morgan Stanley, wrote that the US “needs to own up to the role it is playing in triggering destabilising conditions” in developing Asia. “The problem here is America’s unprecedented shortfall – a national savings rate that averaged just one per cent of national income over the 2004 –2006 period. The more US relied on surplus savers from China and other Asian economies to fund its consumption-led growth, the more the destabilising pressures of bilateral trade tensions will come into play – in economic, financial and geopolitical terms,” he had predicted.

Like in all Asian emerging markets, RBI and the Government are now working overtime to manage a situation where rupee is appreciating on wave of dollar inflow, asset prices are inflating and exports are becoming uncompetitive threatening to increase unemployment.

Asian central banks account for roughly two thirds of dollar reserves and dollar-denominated assets. The pace of reserves growth has picked up in since September 18 and has been continuing in October so far.

China, which has for some time been using its massive holding of US treasuries to counter pressure for yuan revaluation, last week indicated that it may not reduce dollar holdings in a hurry. But if its currency, under a crawling peg, appreciated dramatically, the People’s Bank of China would be forced to sell dollar, it was suggested by a senior official.

While Qatar has announced cut in dollar holdings recently, Vietnam’s apex bank is reportedly considering reduction of purchases of US treasuries and dollar bonds. Kuwait has dropped the dollar peg. Saudi Arabia signalled discomfiture with the dollar peg and brought down interest rate in tandem with the US last month. Iran, which only accepts 15 per cent of the payment for oil in dollar, threatened to refuse dollar completely.

The valuation gains on India’s reserves prior to September 18 suggested reduction in RBI’s dollar holdings. But the recent purchases have changed the scenario.

Ms Hillary Clinton in her presidential campaign has already called for preventive legislation against vulnerabilities -- being held hostage to economic Beijing’s decisions.

At home, on top of the proposed Indo-US nuclear gaining strong political overtones before the Bernanke effect hit the economic policy managers, threat of rising inflationary pressure and apprehension over reduction in employment opportunities or loss of jobs in the export sector have provided additional fodder for political attention.

The stock market still has not fully factored in an early election. At the sentiment level, if the UPA Government falls and election becomes inevitable, it is likely to restrain inflows, in the immediate term.

Strategists, in this short-term fluid scenario, appear to be prepared to take calls as things unfold in the next few weeks, when corporate results and guidance would also pour in. The RBI and the Government may not stop rolling out measures to counter the negatives to the economy and the corporates also for controlling inflationary pressure.

At the risk of sending out signal of a mis-priced rupee, the central bank is likely to continue buying dollar – may be at a higher than normal level.

It may not be surprising if the portfolio money flow slows down a bit this week, much to the comfort of the central bank, in view of higher valuation of benchmark index and increase in risk perception. However, the mid-cap indices may outperform the Sensex and the Nifty.

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