Markets hold out to taper

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Sensex sheds 151 points, rupee slips just a bit in mild reaction to Fed announcement

Markets hold out to taper
The US Fed decision to cut the bond-buying programme by $10 billion to $75 billion a month did not have any major impact on the Indian stock market or money market on Thursday.

Sensex closed 151.24 points lower at 20,708.62, while the rupee ended at 62.14 to the dollar after an initial collapse. This was in complete contrast to the market reaction in May when both the rupee and the equity market had tanked at the first serious hint of US Fed’s intention to taper its quantitative easing programme.

The Reserve Bank of India (RBI) intervened heavily in the forex market after the rupee got battered to 62.48 in early trade. The currency finally pared its losses and closed at 62.14. The oil marketing companies also put in their month-end forex demands, causing the early-trade crash of the rupee.

The rupee was seen opening the session on a weaker note against the dollar as the Fed chairman finally announced that they would be tapering the quantitative easing from January. The rupee closed the session at 62.14. The parity between the two currencies saw a high of 62.48 and a low of 62.07. However, the losses in the rupee were erased to some extent in the later half, as exporters and banks reportedly sold dollars in the market.

The government securities (g-sec) yield, however, softened amid positive sentiments about RBI’s policy actions and the US Fed decision. The new benchmark 10-year security closed at Rs 100.56, implying a yield of 8.74 per cent.

Sensex opened higher despite the Fed announcement. But within seconds of opening, Nifty slipped into the red and traded in the negative zone all day. Nifty closed 50.50 points lower at 6,166.65.

Banks and capital goods companies dragged the benchmark indices down, while IT and pharma stocks were gainers. The decline in bank stocks was offset by gains in IT stocks, which ensured that Nifty loss was not very high.

Had the IT stocks not gained sharply, the overall decline in Nifty would have been much deeper. Another reason why Nifty was able to keep its head above the water was that expectations of a cut in the US quantitative easing were already partly built into stock prices.

For the past four weeks macroeconomic numbers, especially jobless claims in the US, had been showing improvements, indicating that the Fed action would come sooner than later.

On Thursday FIIs were net buyers of equities worth Rs 2,264.11 crore, while domestic institutions were net sellers by Rs 41.59 crore.

Brokers said FII buying shares of Power Grid Corporation in its follow-on offer, which were listed on the bourse, increased the FII net buying.

Deven Choksey, MD of KR Choksey Shares, said, “The Fed’s announcement may not impact FII flows into the Indian market significantly.”

Raghuram Rajan, RBI governor, had said after unveiling the mid-quarter monetary policy review on Wednesday, “We are happy with the reduction in the volatility and that was our intention. We also wanted to curb the unhinged expectations where analysts were competing with each other to see how weak they could proclaim the rupee. We are watchful of the taper but we are certainly more prepared to face the taper when it happens.”

RBI has expanded its foreign exchange reserves by $34 billion to $264 billion through special swap windows for FCNR deposits and by letting banks to raise overseas funds, which flowed directly into RBI’s reserves.

This has helped RBI to be in a more stable position to tackle volatility in the forex market. The enhanced strength of RBI and its ability to deal with any outflow from India’s debt market in case yields in the US market were to harden further, have imparted considerable confidence to the Indian equity market.

Anindya Banerjee, currency analyst at Kotak Securities, said, “The rupee weakened towards 62.48 on spot on the back of a broadbased weakness among Asian and emerging market currencies. The Fed’s decision has led to some weakness in the emerging market currencies. However, slow yearend demand coupled with an improved current account outlook and active RBI intervention means that the rupee may not weaken the way it did in summer. We expect a range of 61 to 64 over the medium term, with markets within the 61.70- 63.30 range for most of that time.”

Forex dealers say the rupee is expected to be range-bound between 61.50 to 62.50 in the medium term.

Abhishek Goenka, CEO of India Forex Advisors, said, “Underpinned by sound economic numbers, the Fed was seen coming out with the decision with full pomp and show. By going ahead with the tapering, it was seen restoring confidence and putting to rest the uncertainty over the US economy’s growth trajectory. The immediate impact of it was the rupee going weak early in the day. But it gained later on the back of dollar selling by bankers.”

(The writer is director of independent brokerage Elan Equity Services and consulting editor of Financial Chronicle)

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