Are policy makers under the US spell?

Font Size

Print

Feedback

Email

Discuss

Save & Share Article

What’s this?

Digg	My Yahoo	Fark
del.icio.us	Newsvine	Reddit

Rate This Article

The bull run on the equities front appears to have vanished almost overnight. Since the beginning of last week till Thursday, the benchmark equity index, Sensex, has lost nearly 1,800 points in a market that fluctuated wildly beyond 2,000 points in intra day trades— at least on two consecutive days.

Foreign institutional investors (FIIs), one of the chief drivers of the Indian bull phase, were big time equity and debt sellers during the week. In the four days since January 18, they sold over Rs 10,500 crore in equities and Rs 934 crore of debt.

When the Federal Reserve cut rates by 75 basis points to 3.5% last Tuesday, in what officials claimed “an emergency’’ measure, domestic fund managers began worrying over the widening differential between the Fed funds and the lesser comparable benchmark rate at home—the 7.75% repo rate of the Reserve Bank of India (RBI).

Also, the India growth story took a new turn with the growth rate now being speculated to move downward to 8% from the earlier 9% forecast.

Unlike the September, 2007 Fed cut of 50 bps to 4.5% that led to a massive spurt in foreign capital inflows, the recent cut is not likely to entail a similar situation. Perhaps the Fed cut is good news for the RBI, that for long, has faced the horrendous task of intervening to tackle a fast appreciating rupee and subsequently sterlising the rupee infusion thereof.

The Fed cut this time has been borne out of a crisis where many top US banks have eroded their capital base as a result of their over-exposure to bad asset lending, namely mortgage home loans to subprime borrowers. Besides, there has been a severe credit crunch since August 2007 there as a result of mortgage defaults that made interbank borrowing costs expensive and slowed down the US Economy.

Back home, while the capital inflows through the FII route being unlikely to spurt significantly as a consequence to the recent Fed move, the concern remains of banks and corporates increasing their overseas borrowings to take advantage of the rate differential and come back with the money. Though there have been restrictions imposed by the RBI on such corporate repatriations, banks do stand to gain. Corporates could find some way to circumvent these.