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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.

  • BHAVIK MEHTA says:

    Wow, Just look @ their Economic Projections from June meet & compare them with yesterday’s release. We’ll find a classic case where the FOMC members acknowledge they are bullish about incoming data from June meet till yesterday’s meet but they are still dovish about QE ( as indicated by chart showing — APPROPRIATE FIRMING OF POLICY RATES ) ————————> STARK CONTRADICTION

  • Raunak Sachdeva says:

    Sir,
    Don’t you think this insanity will create asset price bubbles all over the world(If they have already not). Rising stock and real estate prices that will have nothing to do with real economy.It seems Wall street is in the mood to party circa 1998/99. The longer the opium induced rally will continue, the harder will be the fall.

    • BHAVIK MEHTA says:

      THEIR ULTIMATE AIM IS TO DOMINATE GLOBAL ECONOMIC SCENARIO BY INFUSING CHEAP LIQUIDITY AT ALL COSTS AND THEN WHEN THE TIME SUITS THEM, THEY’LL START COMPLAINING ABOUT YOU CAD / FISCAL DEFICIT & POLICY PARALYSIS.( ALMOST AS IF THESE THINGS NEVER EXISTED WHEN THEY STARTED INVESTED IN OUR COUNTRY )
      * : GOVERNMENT / RULING PARTY BENEFITS AS THIS TRANSLATES INTO HIGHER ECONOMIC REALIZATION OF THEIR BLACK MONEY ESPECIALLY DURING A PRE ELECTION PERIOD LIKE THIS.
      LONG LIVE BEN–“NO”– MICS.

  • Santhanam says:

    Thank You Deepak, for your short and insightful posts.
    For me your Blog is a signal distinct from noices (other business dailies, websites & blogs).
    Keep it up.
    Thanks again.

  • Lakshman says:

    If they don’t taper now, will they taper in October with the all-important Christmas holiday season ahead? Doubtful. Also, with Yellen who is likely to succeed Ben, being widely regarded as being more dovish, some are betting that tapering may not come any time soon, or may never come at all. At least PIMCO seems to think so, and Gross got it right this time.