Deepa Vasudevan on Mon, May 27th, 2013 1:58:22 pm
You are right about the general market nervousness: factors such as the Euro area crisis, and US troubles- the slowdown, the fiscal cliff, QEIII and the mode of exiting from it; contribute to it. You are right also that CAD is easing with falling gold and oil prices- but it continues to be higher than sustainable levels. Factors that keep CAD high include slowing exports; and high gold imports despite imposition of duties. The link between QE and CAD is obvious to the market: if QEIII was to be slowed or withdrawn, the foreign inflows that have comfortably financed CAD will reduce. It is this fear that made Indian markets react so adversely to the Fed communication last week.
Dr D Sundararajan on Sun, May 26th, 2013 6:45:16 pm
A very informative article. FII's have pumped in record money into Indian stock markets in this calendar year so far; which has taken the stock market to 30 month highs; however this has had little impact on the external value of the Indian rupee; this is disturbing; on the contrary Re has depreciated over the last few days substantially. Current account deficit - thanks to high gold imports is indeed a matter of grave concern. It is scary to imagine what would happen should the FII flow slow down.
P K Ganesh Ayyar on Sun, May 26th, 2013 10:44:27 am
Your analyses of the reasons for the markets reacting adversely to Mr BB's lack of clarity on his proposal provides the insight, but a few grey areas still persist. Possibly, you could throw more light on them.
1. While the Fiscal Cliff issue was temporarily resolved on 1st Jan by buying more time, it has not been comprehensively resolved. Markets are still nervous, and hence over react to even news which could affect value of the dollar.
2. The crash of Gold prices reflect the sudden reversal of fortunes for the downward spiral of the dollar, which again explains the reason for Rupee weakening.
3. An increase of 22% in the $ inflow in 2013 over 2012 should actually result a stronger Rupee, with no additional pressures on FII selling stocks. This has not manifested itself, particularly given that the net inflow of $ is positive, and the CAD is easing with crude and gold prices dropping.
In light of these (amongst other) reasons, what is the real impact of the QE III, and Mr. BBs latest fuzzy move???
Shrinil Shah on Sun, May 26th, 2013 10:09:26 am
Thank you very much Ms. Vasudevan. The analysis is enlightening one. But i request you to kindly also put your thoughts on the market behaviour in such circumstances in short run as well as in long run.
KISHORE J BHARMANI on Sun, May 26th, 2013 9:33:48 am
LOGICALLY GOOD BUT POLITICALLY ECONOMY DOES NOT RUN LOGICALLY. IF IT FED REVERSE QE GOOD FOR ALL CONTRY. EXCESS LIQUITY REMOVE FROM THE SYSTEMS AND BENEFITED TO END USER. THAT IS REAL ECONOMY AND REAL PLITICS.
Rajeswaran P on Sat, May 25th, 2013 5:16:12 pm
Deepa Vasudevan has excellently explained QE -
the point of concern is that markets react very agressively on issues like this - certainly is a matter of concern - , without attaching due importance to the valuations of stocks, corpoate performances etc. Well that has become the order of the day.
R n guru simha on Sat, May 25th, 2013 4:49:09 pm
The rupee has to gain over dollar but is not happening even though our economy is doing better than us. I feel the consrajint of RBI is better than the us policy of flooding with cash
Deepa Vasudevan on Sat, May 25th, 2013 9:35:50 am
Your are absolutely right in concluding that liquidity is important, but it is unlikely to overshadow valuations in the medium or long term. Dollar inflows in the past year have actually slowed Rupee depreciation (the same thing as causing appreciation); from levels of Rs.55/US$ in December 2012, the exchange rate had stabilized at around Rs.53-54 since March 2013. Indications of a sudden withdrawal of QE is a threat to inflows on the capital account, which are necessary to balance the 4-5% current account deficit India is likely to post in 2012-13. When the US Fed hinted at slowing liquidity, the market reacted by pulling down the rupee to about Rs.55.61/$ by end of this trading week. If India's fundamental valuations were sound, then this would only be a short term market reaction. However, if the current account deficit persists in this fiscal year, and other parameters (GDP growth, fiscal deficit, revenue deficit, reforms initiated) do not improve, then the depreciation could continue or worse.
Harshil Roy on Fri, May 24th, 2013 4:47:59 pm
Nice article, but some queries,
Why this dollar inflow does not result in rupee appreciation?
Does your article indicate that our market will be down again,if QE is withdrawn or slowed down, resulting into higher interest rates outside India? If this is the right logic then every thing evolves around where liquidity is directed rather than the valuations of the assets.
Timmana Gouda D on Thu, May 23rd, 2013 8:55:25 pm