tapering schedule is likely to be felt by financial markets in emerging markets, which have become so accustomed to the Fed’s easy money policy that the addiction is deeply ingrained in the stock valuations.
What is certain, though, is that the Fed cannot continue expanding the money supply at the current rate. The question, then, is when will the Fed begin to taper? Experts say December, but that’s during the peak of the holiday season, a period when the economy typically does well.
US-based fund analysts say this “seasonality” makes it difficult to determine if the economy is really improving or just experiencing a Christmas boost, thereby making the possibility of the Fed pushing it back until early 2014 a distinct possibility.
The uncertainty of the entire exercise makes the possibility of more gyrations in the emerging economy markets, especially equities, a real concern.
In fact, in Friday’s monetary policy announcement, RBI Governor Raghuram Rajan asserted that the Fed’s decision to put its $85 billion a month bond-buying programme was just “a postponement”, even as he stressed on the need to prepare “a bullet-proof national balance sheet”, especially in the context of the general elections looming large.
On the domestic front, market experts maintain that structural uptrend in this sort of a market could precipitate when the interest rates are low and the return on equity rises, which will happen only when corporate profits go up.
As nothing has changed fundamentally for the economy, and the rise in the markets seem to be only driven by sentiments, the sustenance of the surge in equity markets is unlikely. Therefore investors should not venture to play in the markets on a sharp rally.
The research head of a leading global financial services firm said that the second quarter results will be disappointing and therefore the earnings of companies are not expected to witness any growth which can prove to be another major dampener for the markets.
But experts suggest to book some profits when the markets rise and Thursday offered one such opportunity. The rise on Thursday, which took the Sensex to a near three