Investors are keenly watching for cues from US Federal Reserve chairman Ben Bernanke’s testimony to the US Congress on a concrete calendar on unwinding of a stimulus package that will likely influence currency and equity markets.
The Indian rupee opened at 59.61 after closing at 59.34 levels on Wednesday, shaving off earlier gains from the government’s foreign direct investment (FDI) policy overhaul late Tuesday evening.
India’s monetary and fiscal authorities are seeking to soften the blow on domestic currency and equity markets from what now appears as an inevitable winding down of the easy monetary policy programme in the US.
India’s rupee has crashed to new lows in recent weeks, breaching 61 to a dollar and still counting.
Blame it on QE3 or rather its winding down. It sounds like the name of a robot, but is essentially a financial market jargon for the third round of quantitative easing or QE by the US central bank.
In plain English, it involves a humongous purchase of bonds by the Fed to pump in loads of cheap money into the financial system to help the American economy claw out of its worst fall since the Great Depression.
With the US — that represents about a quarter of the world’s economy — showing early signs of turnaround, and the Fed signalling a calendar of rolling back this stimulus package, capital flow to countries such as India could turn out to be among first casualties.
Asian shares inched up to a near five-week high on Thursday after Bernanke pledged to retain the stimulus, but analysts said the Fed Reserve chief’s testimony have left the market confused as ever.
Bernanke repeated that the Fed may taper QE in 2013 and halt it around mid-2014, but left all options open by saying that “bond purchases could be reduced more quickly if conditions improve faster or maintained longer if conditions are less favourable”.
Financial investors poured $88 billion (about Rs 484,000 crore) into our stock exchanges last year. The tide has since turned.
Financial investors have begun selling Indian stock since the beginning of May and with the curtains likely to come down on the US stimulus package, safely expect more billions to move out at the click of a jumpy mouse once the US central banks starts turning off the tap on easy money.