Fed, diesel spark for markets

US central banker launches $40-bn-a-month bond-buying programme, commits itself to keep rates low

Two crucial moves on Thursday — one by the Indian government on diesel price increase and another by the US Federal Reserve on interest rates and a new bond-buying programme (of mortgage-backed securities, or MBS) would have a positive impact on domestic markets when they open for trade on Friday, market experts said.

The US Fed also kept rates unchanged and committed itself to keep interest rates exceptionally low till mid-2015 (against 2014- end earlier). In the new bond programme, it has committed itself to buy MBS worth $40 billion a month (roughly $490 billion a year). This move will increase Fed’s holding in long-dated securities by $85 billion a month. After the Fed announcement, the US markets went up by a little over a percentage point. Gold and silver gained immediately after the Fed announcement.

Saurabh Mukherjea, head of equities at Ambit Capital, says: “Hike in diesel price is the best bit of positive news that the market has received in last two years.We expect buying from both foreign and domestic investors and expect the market to move up between one per cent and two per cent.”

BOOSTER DOSE
Recent domestic & global developments that could bolster investor sentiment

• Sept 1: Shome panel recommends deferment of GAAR by 3 years
• Sept 6: Draghi gets ECB backing for unlimited bond-buying
• Sept 12: German court approves $1-trillion European Stability Mechanism
• Sept 13: Govt hikes diesel price, caps subsidised LPG for a consumer at 6 a year; Fed undertakes QE3 with $40 bn
• Sept 14: Union Cabinet to decide on FDI in aviation and disinvestment in five public sector units

The decision, experts said, would send a signal to rating agencies about the government’s intent to put its house in order. Thus, in a way, the move would also help ease risks of a potential downgrade of India’s sovereign rating.

On Fed’s decision, Manish Sonthalia, vice-president and fund manager, Motilal Oswal Asset Management Company, said the move indicated more stimulus and liquidity and was positive for the risk assets, which included commodities and emerging markets, including India.”

Vikas Khemani, president and head (institutional equities), Edelweiss Financial Services, said the risk aversion would go away. “All asset prices, including equities and commodities, would go up in the short term. However, rise in commodity prices would be structurally negative for India.”

Some market players said it needed to be seen where (which asset class) the liquidity would prefer to move into in the long run. While some of it was likely to flow into riskier assets like emerging markets and commodities, it was also likely that it would flow into MBS or US Treasuries. Notably, the Indian as well as global markets have rallied since the start of June, led by easing European concerns as well as hopes of a third round of quantitative easing.

Experts also said the bullish mood was likely to sustain in the near term, as there were hopes that the government would also permit foreign direct investments (FDI) in aviation, with an outer chance of the same in multi-brand retail on Friday.

Some also believed that the central bank might further cut rates in its forthcoming meeting on Monday (September 17).