SHOCKER FOR EMERGING MARKETS AS FED EXTENDS TAPER

By Ruma Dubey

First, our RBI Governor sprung a shocker by hiking rates and tonight, Bernanke, gave a fitting parting shot, extending the QE tapering further by another $10 billion. And this does not augur too well for the already weak Indian and other emerging markets. This also shows how much intertwined the entire globe is today though the pulse remains the US Federal Reserve. Today, what Bernanke says or does directly affects people as far away as India and China, Japan and all these emerging economies. That probably means that the Fed is indeed the world’s central bank as today, the Fed holds the strings, not the respective countries central banks.  

A quick read through the further tapering:

• Fed announces it will taper its bond-buying program by $10 billion a month, bringing the monthly total down to $65 billion.
• Decision was unanimous, marking the first time there has not been a dissent at a policy meeting since June 2011
• Labor market indicators were mixed but on balance showed further improvement.
• Fed reiterated that their strategy continues to depend on incoming economic data – this means that Fed’s forecast for continued improvement in the labor market and inflation moving up to the central bank’s 2% target and the Fed will likely reduce the bond program “in further measured” steps at future meetings.
• There was no mention anywhere of potential risks associated with the recent turbulence in emerging-market assets.
• Fed left unchanged its statement that it will probably hold its target interest rate near zero, unemployment falls below 6.5% and inflation remains below the long term goal of 2%.
• The Fed repeated that the inflation persistently below its 2% objective could pose risks to economic performance and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Well, this was the gist of this entire FOMC meet and this was not to be followed with any Press Conference or any further comment from the Fed.

This is surely not going to go down too well with our markets as the new day dawns. But the most pertinent take away from this meet is that as we look ahead at every FOMC, we should brace ourselves for more gradual tapering. Yes, tapering will continue and henceforth it would take a serious US weakness or a major meltdown of emerging markets to make the Fed pause. Most analysts predict, if the emerging markets do not meltdown, another tapering of $10 billion could happen in March. We probably need to factor in the fact that by the end of this year, the Fed could end the bond purchases and this does mean some weakness in the emerging market currencies. Are we ready to handle this?

Our Indians markets surely are and it is doubtful that the ongoing turmoil in Argentina and Turkey could sink the rest of the markets. Rupee could witness some downward pressure and RBI’s Task just seems to have got tougher as Mr.Rajan will now have to field inflation and rupee. The Fed has today nowhere mentioned about the emerging economies and it shows that regardless of the declining currencies in places like Turkey, Russia and South Africa, the Fed is focused only on USA. For emerging economies, which reaped the benefits of QE, it seems to be a hands-off approach from the Fed now. Well, truly speaking the Fed is indeed in charge of only the US markets though what it does affects world markets.

So what happens to the Indian markets post this news? Well, to a large extent the markets have discounted tapering but this is likely to cause some strong ripples. Let’s brace ourselves for a rough ride but soon enough, the dust is sure to settle. Also remember, this tapering indicates that the US economy is slowly but surely getting better and we, along with other emerging markets could benefit from exports to US – that’s a better way to grow rather than depend on the largesse of stimulus.