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It is expected that the Fed would inject anywhere between $500 billion to $1 trillion into the US economy, which is still struggling to find its feet following the global slowdown.
Most dealers and economists say if the quantitative easing exceeds $500 billion, the dollar will slide against other currencies, including the rupee, and may affect the performance of Indian companies that are exposed to the US market.
Though US policymakers hope to boost their economy through quantitative measures like buying back bonds, much of this money is expected to flow to emerging economies like India, with a high interest rate differential.
This has been accentuated by the six rate hikes that the Reserve Bank of India effected during the financial year from March 2010.
But most markets will be able to react to the Fed action only on Thursday because the decision is likely to come at around 1815 GMT.
Government stimulus frees up funds for banks and other big lenders who would otherwise have to use it to maintain solvency and other statutory ratios. The freed funds can then be deployed for fresh lending and a part of it goes to global funds that invest in debt and equity across the world.
For equity markets, this translates into foreign investor inflows and the Indian equity market saw robust net FII inflows immediately after the severe liquidity crunch induced by the 2007-08 global financial crisis (see graph).
Ajit Ranade, chief economist of Aditya Birla group, said, "If the quantitative easing is too excessive, then surely some of it will land in emerging markets like India. Therefore, if such be the case, we will have to be prepared to deal with extra inflows."
On its impact on bond market and rupee, Ranade said, "Since the FII participation is regulated by the RBI, the direct impact will not be too adverse on the bond market. However, if the rupee appreciates too much and too quickly, then exports will become uncompetitive."
Shanto Ghosh, principal economist at Deloitte India, said, "The rupee is already appreciating. With this move, the rupee will appreciate further and hurt exporters. On the bond side, we expect the yield on rupee-denominated bonds to go up."
Abheek Barua, chief economist, HDFC Bank, said, “There is lot of anticipation in the market about the amount the US will infuse. There will be a marginal impact on the exchange rate. But, if the amount is less than $500 billion, it will be a disappointment for the markets.”
GA Tadas, managing director and chief executive officer, IDBI Gilts, told Financial Chronicle, “Rupee is expected to appreciate after the US announces quantitative easing measures between $500 billion and $1 trillion, since it will be beneficial for the US and other countries to buy Indian currency.”
The partially convertible Indian currency closed at 44.35 per dollar compared with the previous close of 44.37/38.
However, a senior State Bank of India official said, though there was high expectation, it could turn out to be a non-event with no significant announcement from the Fed.
Markets have reacted positively to the rate cuts announced by the RBI in its second-quarter review of credit policy on Tuesday. Yields on the benchmark 10-year bond, maturing on 2020, fell two basis points to 7.94 per cent.
Yields on bonds are likely to fall further when the RBI buys back bonds worth up to Rs 12,000 crore through open-market operations on Thursday.
On Tuesday, the RBI raised its short-term lending and borrowing rates and said it was unlikely to adjust rates again in the near future but would remain vigilant against inflation that is still above the central bank’s comfort level.
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