HOW THE RUPEE STACKS UP
Coins below show how many rupees bought a dollar on August 28, when the Indian currency closed at its lowest level yet, and on Thursday after the decision of the US Federal Reserve to leave the stimulus programme untouched
What is the big deal?
The world was bracing for the equivalent of a gigantic meteor to crash into Planet Finance on Wednesday. Turns out it was a false alarm. “You set the whole world up for something and then you backed away,” Eric Green, an analyst, said, referring to the US Federal Reserve’s decision to keep the $85-billion-a-month stimulus programme intact
Why is India so relieved?
A steep cut in the stimulus programme would have sucked out of India funds invested by foreign institutional investors. The cut would have left such investors with less funds to invest in emerging markets, and the returns in the US would have been better than what India could have assured. This would have triggered a fresh crash in the Indian stock and currency markets
So, have we turned the corner?
No. India has fundamental problems such as spending beyond its means and importing much more than what we export. Until such problems are addressed, India will be vulnerable to external swings. The Rs-70-to-a-dollar fear still lurks. Besides, the Fed could revisit the stimulus decision by the year-end or early next year, although any cuts are expected to be gradual. The Fed decision also suggests the American economy is still ailing. Such a diagnosis about the world’s largest economy does not augur well for other countries in the long run
Then why all the noise?
The wave of relief sweeping through the market speaks for itself. After a seemingly unending stream of bad news on the economic and political fronts, the absence of what would have been financial calamity in this part of the world is a good reason enough to party for a day
How did most whizkids in suits get it wrong about the Fed?
That is the $85-billion question. Some feel Fed chief Ben S. Bernanke and the markets are having a hard time understanding each other. Caught by surprise, the analysts are pointing an accusing finger at Bernanke and the US central bank’s communication strategy. Since May, Bernanke had signalled that the Fed could start to wind down its efforts to stimulate borrowing and economic growth
What is Ben saying?
Bernanke appeared to put some of the blame on Wall Street. He suggested that some investors were not paying sufficient attention, pointing to his past promises not to change policy until economic data, and particularly unemployment numbers, showed significant improvement. “Asset purchases are not on a preset course,” he said with audible frustration. “They’ve always been conditional on the data.” Michael Hanson, one of the few analysts to have predicted the Fed decision, said at least some of the fault lay in Wall Street’s inability to hear the nuance in Bernanke’s past statements
Who is right?
Both. Figuring out what would happen involved navigating in uncharted territory: the breadth and scale of the steps taken by the US central bank in the wake of the financial crisis have been without precedent. “We are dealing with tools that are less familiar and harder to communicate about,” Bernanke said
OK, now the conspiracy theory...
Some analysts believe the Fed purposely misled investors to push up interest rates and knock out speculation in risky financial products. Bernanke gave some fuel to this argument when he said he had been gratified to see the sell-off over the summer in more speculative products like junk bonds. But most economists cited unintentional flaws in the Fed’s analysis and communications.
Reporting from New York Times News Service