Bernanke buys time for India to get its act together

Markets exuberant on continuing liquidity but for how long?

Ben Bernanke & Raghuram Rajan

Indian equity markets have rejoiced more than the US markets after Federal Reserve Chairman, Ben Bernanke decided to postpone reduction in its bond buying program. While US markets barely rose by 1%, Indian markets were up by 3.4%. India is the top performing Asian market; others have gained on an average by 1%.

Markets barely reflect the impact of tapering on both the markets. In the US, majority were of the opinion that Bernanke would announce a moderate taper and an average outlook for the economy. Short positions were built in anticipation of such a move. However, the moment Bernanke announced that there would be not tapering, short covering rampage and fresh buying pulled the US markets higher to close at a new high.

Indian markets opened sharply higher as their prayers were answered and continued to push upward. For India and its financial markets, stakes were higher. A mere announcement of tapering in Bernanke’s May 22, 2013 speech had caused havoc in all markets as money started leaving the country’s shore.

By no way the US announcement would tempt analysts to be overweight on India. However, it assures that there will not be a flight of capital that was witnessed over the last few months. This is a big relief as far as Indian markets and the corporate world is concerned.

It is unlikely that we will see money coming in the equity markets, but the debt markets can once again witness steady flow of capital and thus stabilize the currency. A weak rupee had triggered the panic in recent past. Bernanke’s altruism ensures a stable currency environment. Fed’s announcement gives Indian policy makers and its markets breathing space and provides room to get creative and effective.

However, Bernanke’s commentary highlights the fact that US economy is not yet in a position to grow on its own and will need continued dosages of liquidity infusion. A sharp rise in interest rates and few new job creation is an indication that all is not well despite pumping in over $3.7 trillion dollar in the economy. Growth was largely on account of housing sector, but rising interest rates has started affecting this growth. The money train will continue to run for a few more months.

Perhaps that is all the time RBI governor Raghuram Rajan and Finance Minister Chidamabram have to get their act in place. India’s economy continues on its slow pace, all that the Bernanke has done is assured that he will not pull the rug under our feet.
However, the market’s euphoria has once again pushed the pendulum on the other extreme, taking valuations way ahead of ground fundamentals. All eyes are now on Rajan to sustain the momentum provided by Bernanke.