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Market watch | Week of reckoning

Reams have written, thousands of minutes spoken about the importance and implications of the US FOMC meet scheduled this Tuesday, writes Udayan Mukherjee.

business Updated: Sep 16, 2007, 22:34 IST
Udayan Mukherjee
Udayan Mukherjee

Reams have written, thousands of minutes spoken about the importance and implications of the US FOMC meet scheduled this Tuesday. Now we have come to the event itself. This endless speculation will give way to the market assessing what Ben Bernanke does and says and life will have to carry on after that. The time for thought is over, it's time for action now.

The way the market is positioned now is fairly simple. If there is no rate cut, there will almost certainly be a sell off, globally. One can debate whether this will be a prolonged sell off or a short, sharp one, but one knee-jerk reaction is inevitable. If it's 25 basis points, that's pretty much in the price so the disappointment of not getting 50 bps may become the dominant force; we may see a mild downward reaction, maybe even a short lived one. This one's a bit tricky though. If there is a 50 bps cut, there will be a rally. A rally, which takes the Sensex to new highs too. After the initial rally though, people will start wondering whether such stern action from the Fed actually means they fear a recession and are throwing everything at it to avert the crisis.

The key thing to take away from the Fed statement is whether they are hinting at a rate cut cycle again. I doubt whether they will lay it out quite so early or easily but if any such sub text is apparent, emerging markets may get in to a more sustainable rally mode. Per se, rate cuts are good news for emerging markets. It means more money for us. It also means that active steps are being taken to avert a US recession, a situation we would like to avoid, however immaterial the direct impact may be.

That said, this FOMC meet is probably not the big event the markets have made it out to be. There is enough money in the global financial world today, which will seek out growth. In the longer term the money that is buying into markets like India has little sensitivity to whether the US interest rate is 50 bps higher or lower. Growth rates in emerging markets have even less to do with small rate changes in the US. Ideally, we should be neutral to these events. If there are rate cuts, it's good, if not, life carries on. Sure, in the absolute short term some liquidity adjustments will happen, there may be 5-6 per cent swings, but that’s par for the course. Unless, as I said earlier, we get the sense that a big rate cutting cycle is beginning again, which has definite positive ramifications and then a bigger rally can be justified.

The genesis of this constant fixation with events is actually quite simple: There is uncertainty globally, investors are skittish/circumspect, they need crutches at periodic intervals to make the next move. In India, whether this is an excuse to make a crossover into a new high or an excuse to correct after our recent pullback, we will find out on Wednesday. But make no mistake; the FOMC meet is no life-altering event for our markets. It's another round of noise for a market that is essentially going through a fairly violent bout of consolidation.

(The writer is Executive Editor, CNBC-TV 18)

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