The gesture of Fed Reserve that it may reduce the pace of its bond purchase program at the end of this 2013 and completely scale back in the middle of 2014 has already made foreign institutional investors (FII) pull out their funds from emerging markets like India. They have made huge sell-offs in debt and equity markets of India. This happened even some days before the Fed’s indications about its bond buying program. Consequently, Indian economy has started witnessing the downfall of the value of already destabilized rupees to the greatest level against major currencies especially against US dollar due to high current account deficit during October-December quarter of 2012 since June 17.
It sees rupees’ bearish trend for the previous 13 days. The reduction in the revenue of exports and huge imports of crude oil, gold, and coal led to current account deficit (CAD) at a shocking 6.7% during October-December quarter of 2012. Though January-March 2013 quarter showed some improvement in CAD which declined to 3.6% of GDP against preceding quarter, annual records of current account during the year 2012-2013 confirmed it to 4.8 % of GDP which is a record high.
Fed reserve began loose money policies like bond buying program, fixing lower or zero % interest rate etc., to stimulate the undermined US economy 5 years ago. That is US central bank’s liberal money policies enable US insurance companies, mutual funds, Investment banks etc. to invest their money in global markets to get more returns. US Apex bank will possibly downsize or discontinue its bond purchase program, when the US unemployment rate drops to 7% approximately or its inflation increases above 2.5%. Fed people are expecting that this will happen at the end of 2014.
However, on Friday (21.06.2013) one of the Fed‘s Governors, Jeremy Stein, said that the Fed may consider decreasing the size of bond purchase during September. India, which is one of the emerging markets, will be an affected one, as FIIS withdraw their funds from these markets to put in and earn more revenue in their home land. After reducing or stopping the quantitative program, the Fed is likely to hike interest rates gradually. Besides, when FIIS keep their funds in rupees instead of dollars at the time of a satisfactory recovery in US economy, they will likely to receive only lesser earnings.
Hence, Indian investors and traders should keep vigil on FIIS activities while they decide to invest or trade in stock or commodities markets.