Sensex, Nifty, rupee down after US Federal Reserve trims bond buying

Finance Minister P. Chidambaram on Thursday said India is better prepared to deal with the situation arising out of a cut in the US bond purchases and the local markets have already factored in the impact of such a move.

Minimal impact

Despite the Finance Minister’s assurances, the stock and currency markets closed the day with losses, but the impact was minimal and not as severe as feared by analysts.

“If any other policy responses are required, we will respond. At the moment, we think that all that has been announced has been factored in,” Chidambaram told reporters after the US monetary authority initiated the much-awaited tapering or quantitative easing (QE).

Accordingly, the monthly purchase of bonds will be reduced to $75 billion from $85 billion. This would result in lower fund flow from the US, which, in turn, will affect the stock markets in emerging economies, such as India, which hugely depend on foreign funds.

Although the stock market in India opened on a positive note, nervous selling brought down the BSE Sensex and NSE Nifty. However, a Finance Ministry statement did push back bear cartels slightly. Finally, the Sensex closed at 20,709 with a loss of 151 points, while Nifty closed at 6,167 -- a loss of 51 points.

Expressing confidence, the Finance Minister said: “I believe it has not surprised the market and I think the consequences should not be very large. Even if there are some consequences, I think we are much better prepared. We have taken a number of measures,” he said, while pointing out that the US authorities did not announce a sequential taper. It announced a one-step taper, which means at least for the foreseeable future, month after month, they will still purchase $75 billion worth of securities.

Meanwhile, India has increased the quantum of bilateral currency swap arrangement with Japan from $15 billion to $50 billion, a move that will help stabilise the rupee, Chidambaram said.

Currency swap

On Wednesday, RBI Governor Raghuram Rajan signed an agreement with the Bank of Japan on a bilateral currency swap arrangement. The Government believes this measure will not only strengthen financial cooperation between Japan and India but also strengthen the rupee against the dollar.

Talking about the rupee, Chidambaram said the Government expected the Indian currency to remain stable. “You do not look at the rupee-dollar rate every hour or every other hour. You look at it over a period of time. Over a period of last several weeks, the rupee has been stable and we expect the rupee to be stable,” he said. The rupee closed at 62.14 against the dollar, showing a loss of 5 paise over Wednesday’s close.

Agreeing with the Finance Minister’s views, market experts believe India is in a much better position than it was in July to face the tapering. “Since the tapering (in the US) is going to happen gradually, it will not impact the Indian markets for the time being,” N.S. Venkatesh, Chief General Manager (Treasury), IDBI Bank, said. He expects the rupee to trade in the 61-63 range against the dollar up to March 2014.

Ashok Gautam, Senior Vice-President (Global Markets) with Axis Bank, said, “So, the cat is out of the bag. Now the market can act according to other data points as the uncertainty is off the market and it has digested the news. Also, the tapering is only $10 billion, which is not higher than the expected amount. Therefore, this time the market was better prepared.”

(This article was published on December 19, 2013)
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