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Wed 11 Sep, 2013, 12:59 AM IST - India Markets open in 8 hrs 1 mins

Why is the US Feds Sept meeting important to India?

By Simplus Information Services | Yahoo Finance India 10 hours ago

It is a classic case of globalization a decision in one country affects another. The US Federal Reserve has been buying bonds from the market and spending dollars. That meant market participants like banks, investment funds, pension funds and even average American who invests in financial instruments could get hard cash easy i.e. dollars. They in turn put this money in markets like India, Brazil and Indonesia as they were getting high returns than their home market (US). Now that is getting over. The US Federal Reserve has indicated it will gradually start tapering its bond purchase program which mean they wouldn't spend as much as the $85 billion that they were spending every month. After the 2008 financial crisis, the US central bank started buying bonds in the hopes that cheap money in the market would fuel demand, and thereby kick start the US economy.

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Here are a few things to note about the meeting and how it will affect India: Meeting agenda: Federal Reserve Chairman Ben Bernanke signaled in May that the US is looking to cut down its mega bond-buying programme as the US economic growth starts to show signs of improvement. While Bernanke mentioned his intention to begin the tapering in the next financial year, he did not give a timeline. The next meeting of the US central banks Federal Open Market Committee (FOMC), in September, might see a decision being taken on the time line of the pull back of the money depending on improvement in jobs, inflation and growth. However, recent economic data from the US does not signal a big change from May. While growth has improved, job growth and inflation still remain lower than expected. Dollar gets muscle: Bernankes announcement that he is looking at reducing the money the Federal Reserve pushes to the US financial system sent global markets into a tizzy. The dollar gained on hopes that the cheap money era in the US is over. Investors, who were cash-rich due to the QE, started exiting investments in emerging markets like India as the sentiment on the dollar improved. The Indian currency has seen the biggest setback due to erosion of these dollar flows. It is down 18% against the dollar this year and is the worst performing currency against the dollar in Asia. The Rupee goes for a toss: Any indication on the start of the rollback of the QE is likely to cause the rupee to slump further. A weak rupee is bad news for the Indian economy as it makes imports costly. It will widen the current account deficit, and more importantly, it pushes inflation higher as fuel and as a result goods become expensive. A weak currency also makes raw materials costly for Indian industries, thus impacting their profitability and competitiveness.

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Why is the US Feds Sept meeting important to India? - Yahoo! India Fi...

http://in.finance.yahoo.com/news/why-is-the-us-feds-sept-meeting-imp...

Impact on Capital Markets: Not just the currency; Indias stock markets too took a tumble after Ben Bernanke announced that he intends to reduce printing dollars under the bond buying programme. The Markets too will keep a close eye on the outcome of Fed meet on September 16-17. Interest rates and Inflation: The RBI has been under pressure to cut interest rates to help fuel growth. However, a depreciating rupee has not allowed the RBI to do so. If the rupee continues its free fall and fuels inflation the RBI may have to increase interest rates. This in turn will hurt the already crawling economy. An increase in rates will have an impact across sectors, from manufacturing to real estate. The Silver lining: The only silver lining in the story is the IT sector and Indias export sector. A weaker rupee makes our exports cheaper and improves competitiveness in the world market. The Indian IT and software companies are the largest exporters in India. They earn in dollars and other foreign currencies. This, when converted in rupees, means higher revenues and profits. This work is produced by Simplus Information Services Pvt Ltd. Customer engagement through content. Like this article? Click here for more articles from the same provider.

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