The Event
The highly anticipated meet of the US Federal Reserve concluded yesterday. The outcome as interpreted by markets is not the most desirable insofar as it cements expectation of a „tapering‟ in the Fed‟s QE program starting sometime late this year. The Fed‟s outlook on the US economy as well as statements assessing receding in downside risks seemed to indicate greater confidence in the strength of recovery. Also, in the post policy conference Chairman Bernanke indicated a much lower threshold for tapering asset purchases; even though he indicated a much higher threshold for an actual hike in policy rates. Should the Fed‟s current economic projections pan out, the Chairman indicated tapering in QE starting later this year and a complete halt by mid of next year. Importantly, however, this is based on economic forecasts panning out. Should they undershoot expectation, the tapering may get delayed or the program may in fact be hiked as well. Furthermore, the Fed is likely to continue to reinvest maturing assets so as to keep overall size of their balance sheet from reducing even when new asset purchases stop.
The Effect
Emerging markets across the world have been volatile ever since the first hint of QE tapering was picked up from Fed comments in May. Currencies and bonds have been sold across these countries as investors have started portfolio rebalancing in light of Fed expectations. The rupee has borne its share of brunt as we are amongst the highest current account deficit countries in Asia, and hence deemed the most vulnerable. On the other hand, given limited FII participation in Indian bonds, rise in bond yields has been very muted when compared to more „open‟ countries like Indonesia. Today, post the event, the rupee has depreciated further towards the 60 mark while bond yields have risen by around 10 bps.
The highly anticipated meet of the US Federal Reserve concluded yesterday. The outcome as interpreted by markets is not the most desirable insofar as it cements expectation of a „tapering‟ in the Fed‟s QE program starting sometime late this year. The Fed‟s outlook on the US economy as well as statements assessing receding in downside risks seemed to indicate greater confidence in the strength of recovery. Also, in the post policy conference Chairman Bernanke indicated a much lower threshold for tapering asset purchases; even though he indicated a much higher threshold for an actual hike in policy rates. Should the Fed‟s current economic projections pan out, the Chairman indicated tapering in QE starting later this year and a complete halt by mid of next year. Importantly, however, this is based on economic forecasts panning out. Should they undershoot expectation, the tapering may get delayed or the program may in fact be hiked as well. Furthermore, the Fed is likely to continue to reinvest maturing assets so as to keep overall size of their balance sheet from reducing even when new asset purchases stop.
The Effect
Emerging markets across the world have been volatile ever since the first hint of QE tapering was picked up from Fed comments in May. Currencies and bonds have been sold across these countries as investors have started portfolio rebalancing in light of Fed expectations. The rupee has borne its share of brunt as we are amongst the highest current account deficit countries in Asia, and hence deemed the most vulnerable. On the other hand, given limited FII participation in Indian bonds, rise in bond yields has been very muted when compared to more „open‟ countries like Indonesia. Today, post the event, the rupee has depreciated further towards the 60 mark while bond yields have risen by around 10 bps.
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