Last Wednesday, when the policy making arm of the US Federal Reserve ended its two-day huddle, the world was hoping the FOMC would hold its horses and refrain from signalling it is ready to wind down its bond-buying programme. While the FOMC held the rates and its $85-billion-a-month bond purchase plan intact, in a press conference that followed the meeting, Chairman Bernanke signalled the Fed could consider rolling back its stimulus later this year.
We all know what happened thereafter. Barring the dollar, all asset classes were beaten down mercilessly. But this was waiting to happen. Ever since the Fed began its QE3 in October last year, it was known that emerging markets were partying on borrowed money. Whenever the Fed dole will stop, the emerging markets will sell off.
While this worry had been on the mind of the investors for a long time, it really caught the fancy of the markets when the minutes of the April 30 FOMC meeting were released on May 22. The minutes showed some members had urged that Fed begin tightening its stand from the June meeting.
May 22 was a watershed day because volatility has increased since then across asset classes. The yield on the US - 10 year, quoting at 1.94 per cent on May 21, jumped to 2.25 per cent on the eve of the FOMC meeting.
The mere expectation that the Fed could consider slowing its stimulus programme has sent the bond yields in the US higher. This has changed the equations for the FIIs who invest in the debt market in India. While the repo rate cuts by the RBI have not been passed to the Indian borrowers, the yields have been shaved. As a result, the FIIs find the bonds not worth their while considering the risk they entail.
Till May 21, FIIs had invested a net of Rs 30,471 crore in the debt market in 2013. But in a month, on Friday (June 21), the net figure stands at minus Rs 116 crore. They have sold Rs 30,587 crore in less than a month. No wonder, the rupee saw its life-time low last week.
On Friday, the yields further climbed in the US to 2.53 per cent, the highest since August 2011. At the time of writing on Monday, the yield had risen up to 2.61 per cent in electronic trade. The fire fighters on the mint street have their work cut out for the week.
Dr Subbarao can do little under the circumstances and an election-bound government will not want to take any risk of slashing subsidies. But the government may give some practical advice to LIC to tender their shares in the HUL open offer. However, the insurance giant holds just 3.2 per cent stake in the company. North Block mandarins, for a change, would be praying for the success of the HUL offer so the money does come into India and rupee gets a temporary reprieve. Else, the only time they kneel before the altar is when a PSU FPO is in the market.
After a brief bullish spell, Abenomics is failing in Japan and the Nikkei is down 18 per cent from the top in the 3rd-largest economy. With call rates in China touching 29 per cent and the Shanghai Composite Index slumping 5.31 per cent, the second-largest economy is in turmoil. With a contracting June PMI in China, signals are rather weak for the global trade.
The positive side of the entire Fed saga is the Fed policy is not cast in iron. It is continuously evolving and dependent on incoming data. The Fed has laid down two targets, an unemployment rate of 6.5 per cent and an inflation rate of two per cent.
One fundamental change you would see is the markets will respond positively to any weak economic data emanating out of the US.
The writer is head of private broking and wealth management, HDFC Securities
