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Foreign help to fight Fed fright

Mumbai, Dec. 19: The much-dreaded tapering by the US Federal Reserve may have finally happened, but there is no immediate prospect of outflows from foreign institutional investors (FIIs).

A day after the US central bank announced that it would cut monthly purchases of bonds to $75 billion from the current level of $85 billion starting January 2014, the pundits said the wind down of the bond purchase would have only a moderate impact in the immediate term. The optimism was based on the presumption that FII inflows would depend on domestic macroeconomic conditions.

Further, statements from the US central bank indicate that its economy is on a recovery path and this may bode well for export-oriented sectors such as IT services in India.

This view was being articulated even as domestic stocks fell on market worries that foreign flows to emerging markets such as India would start drying up. The Sensex fell 151.24 points to close at 20708.62, while the 50-share CNX Nifty on the National Stock Exchange dipped 50.50 points, or 0.81 per cent, to 6166.65.

While ensuing liquidity on account of the bond purchases by the US Federal Reserve had benefited the emerging markets, India saw outflows since June after the tapering announcement in May. The worst affected were the debt markets as nearly $13 billion flowed out (June-November) and this resulted in the rupee hitting a record low in late August.

However, market mavens are not foreseeing any significant outflows once the taper kicks in though they concede that winding down of bond purchases may impact the

domestic stocks and bonds.

The pundit’s view appeared to be buttressed by provisional data from the stock exchanges that showed foreign investors had made net purchases worth Rs 2,264 crore today. The FIIs have made a net investment of $1.86 billion till date this month.

Experts say the domestic economy is now on a much better footing to handle any shocks with the RBI now having more power in its arsenal. That was proved today when the rupee, which had opened lower on the taper news at 62.25 a dollar from the previous close, quickly slid in a knee jerk reaction to the day’s low of 62.48. However, intervention from the central bank through state-run lenders saw the currency recovering to a high of 62.07. It closed at 62.14, a drop of five paise.

“The Indian economy is better placed to face such an outflow as the balance of payments situation is stronger relative to May with the current account deficit coming down and additional capital funds being gathered through the swap scheme of the RBI. FII flows into equity have been positive during this period, with the number being positive in the last three months. Hence, equity flows may still be determined by factors beyond interest rates, which will matter for debt flows,” said Madan Sabnavis chief economist at CARE Ratings.

Sudip Bandyopadhyay, managing director and CEO Destimoney Securities, said though the stock markets saw some nervousness today, it was likely to shrug off the taper development and move ahead in the days to come.

“If our fundamentals improve, we will outperform the global market and foreign investors will put in more money,” he said, adding that though the US Federal Reserve may be trimming its asset purchases, other central banks like in Japan continue to pump money into the economy and this will result in global liquidity flowing to emerging markets.

Market circles also point out that one must not assume that lowering of bond purchases by $10 billion per month will result into an equal drying up of flows to India or other markets.

However, there are a few who advise caution. Alok Churiwala, director of Churiwala Securiites, said Indian equity markets may not immediately feel the heat but it could see some impact as the tapering progresses.

“There could be a slowdown in FII flows. But how slow, only time will tell. One must also remember that we have another major event coming up next year which is the general elections and the FIIs may choose to wait for the outcome of the elections,” he added.

 
 
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