The US markets, which have performed well over the last couple of years, had rallied smartly on Wednesday after Fed chairman Ben Bernanke reassured markets that interest rates would remain low even after unemployment fell below 6.5%.
While the Sensex closed 151.24 points lower, the rupee lost some value, closing at 62.1162 to the dollar, down 0.02%. Most market watchers believe that the taper has been pencilled into asset prices and that a sell-off like the one seen in May, when Bernanke first indicated there might be a withdrawal of stimulus, is unlikely. At the time, foreign investors sold more than $5 billion worth of bonds in a month, while equity outflows in the three months to August totalled $3.5 billion. The rupee hit its lifetime low of 68.825 in late August. However, analysts feel that this time around, the markets are better prepared and that much of the impact of the taper is built into asset prices.
The Indian rupee and bond markets may be only marginally impacted, Ananth Narayan G, head, global markets, Standard Chartered Bank, observed. Since the CAD is far smaller now and we have $34 billion in FCNR deposits, we are better placed today than in May, he said. Bankers do not rule out dollar outflows but believe it would be limited since the economy is showing signs of recovery. The rupee is expected to move in the 61-63 band and should most likely outperform its Asian peers, dealers said. FIIs were net purchasers of bonds, investing about $520 million so far in December.
Nevertheless, there is some degree of caution.
Andrew Holland, CEO, Ambit Investment Advisors, for instance, expects some volatility in the short term and is not sure how resilient markets will be when the withdrawal begins. We will have to wait and see how markets react to the first round of tapering. However, the Fed has said that it will be accommodative, which is good news, Holland said.
Garry Evans, global head of equity strategy, HSBC, wrote that the size of any correction in equities markets should be limited. However, Evans warned that earnings will need to turn positive to keep the bull market intact, as QE was coming to an end.
The Feds decision to taper QE could hold back global equities in the short term. This has been the experience on previous occasions in the past four years when the Fed scaled back its asset purchase programs or signalled that tapering was imminent. However, we believe the size of any correction should be limited this time, Evans wrote.
Foreign investors may not have returned to Indias bond markets yet, but have been buying equities and are understood to have bought $365 million of Indian shares on Thursday.
With inflows of more than $19 billion so far in 2013, India has attracted more flows than most peer markets.
Barclays Capital was positive on emerging markets. EMs are likely to be constructive after the Fed decision. Risk has diminished and it supports our view that 2014 is likely to experience some positive portfolio inflows, albeit more directed to equities than bonds. EM currencies are likely to enjoy a lift from the reduced risk on portfolio outflows, a Barclays Capital note read.
Manishi Raychaudhuri, Asia-Pacific Strategist, BNP Paribas Securities opined that the US authorities must be fairly certain about the sustainability of the growth recovery. If they had any doubts the recovery wasnt sustainable, its unlikely the Fed would have embarked on this exercise. As such, I dont think we need to worry too much about equity market valuations, Raychaudhuri said in an email response.