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Commentary

The Fed Does Not Taper

The US Fed decided to keep buying bonds worth $85 billion a month. There is therefore none of the expected “taper” in the bond purchase program that had recently spooked investors.

The Fed is shifting goalposts but they believe that a move to taper in any way would cause damage. They believe the current data is good, but they think the action to taper would hurt the recovery. Effectively, Bernanke said they are likely to taper on demand later this year if things continue to go right, but they won’t touch rates for a long time.

The wait is over, and US markets are up big. Indian stocks listed (ICICI Bank, HDFC Bank) are up even more big (as much as 8%!).

I believe Indian markets will be up big time tomorrow, unless there is some other announcement between now and then.

The rupee should rise against the dollar. Already, non deliverable forwards are going at less than 62 (it seems).

Crude and gold prices are up, which is a negative. This will keep our current account deficit wide.

What will Rajan do on Friday? Likely now that there is no fear of a taper immediately but the taper could still come in later this year, this is a good chance to ensure we don’t get horribly screwed by the fund flows outward if that should happen. So we could start the rate raising cycle to get inflation under control. In addition, the tight money policies might continue but be eased off a bit considering that the dollar-rupee equation has moved in our favour.

But I expect the focus to move back to India. We still have a horrible current account deficit, bad fiscal policy, low growth and high inflation. Nothing the fed has said is likely to change any of that. So while markets rejoice in the short term, they will have to see these issues being addressed soon, otherwise we’re going down again.

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