QE tapering
One of the major concerns bothering Indian economy is the shift
in the US Federal Reserve’s shift in policy stance – from very loose monetary
policy to consolidation over next few years. Given that such shift shall be
driven by improving economic fundamentals and not inflation, the USD is likely
is strengthened by Fed tightening, much like 1999-2000.
The concern therefore is that at a time when Indian economy is
struggling with structural weakness on account of falling growth led primarily
by decline in investments, rising current account deficit, high fiscal deficit
primarily due to unsustainable subsidies etc., a further fall in INR vs. USD
and consequent hardening of interest rates may compound the problems and
further delay the recovery.
In our view, it is a valid concern. However, we do not subscribe
to the idea that it will lead to any collapse. For one, it is unlikely that any
US monetary tightening will be disruptive, as economies outside are not showing
much signs of economic recovery. Any disruption therefore may potentially stall
the US economic recovery too, which is not a desirable outcome. Therefore, in
our view, the easing process (popularly referred to as ‘tapering’) shall
reverse if it causes significant disruptions.
Secondly, a weaker INR may not be a bad outcome for India as it
may help growth of external sector. Nobody is betting on the recent bout of
extreme volatility in currency value to last for long. Moreover, in the process
INR may have accounted for a disruptive US monetary tightening, and therefore
expecting further weakness in INR in near term may not be appropriate.
Thirdly, US monetary tightening may further restrain the already
benign global inflation, a positive for India. This coupled with lagged impact
of good monsoon, may actually bring the inflationary expectations down and thus
alleviate the need for sharper rate hikes in near to short term Though we
continue to believe that rise in US bond yields will lead to higher rates
globally, including India, in midterm.
Fourth, monetary tightening in US may not necessarily lead to
tightening in EU and Japan. In fact, it may lead to further easing, especially
in Japan, to avoid the deflationary pressures to undermine the nascent economic
stability.
For records, TARP – the US government US$750bn response to
Lehman collapse, has more or less been withdrawn. No one talks about it. No one
sulks over its withdrawal.
We had suggested in one of our earlier posts that QE
is a matter of fact, not going anywhere. It will remain here till it
completely outlives its utility – not likely in next 3yrs at the least, most
likely till the time EU economy shows definite signs of revival, Japan achieves
its objective of creating nominal inflation in the economy and gets out of
decades of stagnation, and global trade rebalancing especially in relation to
China makes steady progress.
We continue to suggest overweight on unleveraged exporters in
IT, pharma and auto space.
Also read:
What is ailing Indian economy and financial markets?
Thought for the day
“It is clearly better that property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition.”
- Aristotle (384-322BC)
Word of the day
Provenance (n)
Origin; Source
(Source: Dictionary.com)
Shri Nārada Uvāca
Should the Food Security Law provide for criminal liability for the minister and officers in-charge in case a death by starvation occurs?
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