Opinion Ben Bernanke’s call
Very rarely does just one single event hold so much in balance for the rest of the world.
-
Share -
-
-
Very rarely does just one single event hold so much in balance for the rest of the world. The air of uncertainty created around a potential clampdown in the US Federal Reserves third round of quantitative easing (or QE3) through which the US Federal Reserve buys $85 billion in bonds every month and thereby pumping money into the financial system has badly rocked the global financial world in recent weeks.
For one,the conclusion of the Feds two-day policy meeting on Wednesday (morning in Washington,late evening in Delhi),where chairman Ben Bernanke is expected to break the suspense on whether the central bank will stay the course or pull back on its loose-money policies,could bring in some much-needed stability in the broader FII capital flows and,in turn,a semblance of sanity in the currency markets. While there is every bit the danger that if the Fed were to dramatically turn off the drip of cheap money,markets across the globe could go into economy-threatening tailspin,the chances of Bernanke making any drastic moves have been projected as remote. But a scaling back of the US stimulus policy,however tepid,is expected to adversely affect liquidity in global markets. India is likely to be among the most affected by the backwash.
For an economy with slowing growth and a heavy dependence on foreign capital to fund the deficit,the consequences of the Fed chairman going easy on the winding up of the stimulus could well be the difference between a short-term scare or a full-blown crisis. Indias rupee has weakened the most among emerging markets after the South African rand since May as investors continue to flee assets most vulnerable to the end of a liberal US monetary policy. In Indias bond street,the rupee is being battered as foreign investors have net sold rupee debt of $4.7 billion over 18 sessions. Plus,the import cover months of imports forex reserves can fund has halved to about six months in the past twenty weeks. While the funding of Indias current account deficit remains the biggest concern for investors,the worries were reinforced after data on Monday showed trade deficit widened to a seven-month high in May on slower exports and continuing demand for oil and gold. Plus,a sharp decline in the rupee could stoke inflation,which the RBI has struggled hard to control over the past few years. Estimates suggest a 10 per cent fall in the rupee could add 60 basis points in the short term to headline inflation.
On the flip side,if one were to view this positively,the US Feds actions halfway across the world could impart the sense of stability that global financial markets badly need. For the UPA government,the task is cut out. Getting on with the job of consolidating the fisc and boosting non-portfolio foreign investment flows through booster measures for the sagging manufacturing and services sectors could hold the key,whichever way Bernanke chooses to tread.
Anil is a Senior Editor based in New Delhi.
anil.s@expressindia.com
-
Share
-
-
-
Share
