US ends QE today: Why Indian markets will continue to get 'easy money'

NEW DELHI: As widely expected, the US Federal Reserve is likely to end its third round of the so-called quantitative easing program or QE3, when it concludes its two-day policy meet today.

The central bank has employed three rounds of bond-buying programs, since the 2008 crisis, to stabilize the economy and support the financial system, which pushed the asset prices higher across the world.

Strong global liquidity and the BJP victory in the general elections were prime reasons which pushed the index to record highs. The index rose 28 per cent so far in the year 2014, as of data collected on 29 October.

So, with the QE almost coming to an end, will the Indian markets correct significantly from here? May be not, say experts.

Yes, volatility cannot be ruled out. But the flow of money will go on and India happens to be in a sweet spot compared to the rest of the emerging market economies, they say.

“It is a given that QE is going to end from the US, but at the same time, ECB is looking to start another round of QE. Bank of Japan will come up with another QE, but the dollar is going to be strong and it is the dollar that determines the liquidity in the world," says Rahul Chadha, Co-CIO of Mirae Asset Global Investments.

“The way we look at it is that countries which do the necessary reforms will get the capital because there is going to be enough capital in the world. Thus, it is not a question of everybody getting free money, which is why we remain more confident about India than other economies like Brazil, Russia, etc,” he added.

India has managed to hold onto its macro factors, which is a very good thing, when compared with the rest of the emerging market economies and that will aide capital flow.

Growth seems to have bottomed out, crude is falling, inflation is stabalising, economy is showing signs of recovery and corporate earnings are expected to grow considerably in the next couple of quarters, which may attract more foreign capital to India.

FIIs have already pumped in USD 14 billion into the domestic equities so far this fiscal and it is all set to increase next year. The total exposure of FIIs in the domestic market is USD 25 billion, with USD 11 billion in the government bonds, said a PTI report.

“There are a lot of positive thoughts around the Indian economy right now, largely thanks to the impressive election victory by Mr. Modi’s party,” said William Hobbs, VP Research, Economics & Strategy at Barclays.

“If they achieve some of the things that they set to achieve in terms of making the Indian economy less bureaucratic to a certain extent and more efficient, then that could see growth rates rise,” he added.

Will US interest rate hike impact markets?

One thing which experts feel will fuel volatility is comments from the US Federal Reserve on interest rate hike, which could probably happen in the second half of calendar year 2015.

Ending a two-day discussion on Wednesday, the US Fed is expected to announce the end of its monthly bond buying program. But experts feel that the first rate hike will be somewhere in the mid next year, which is not going to be as severe as most people expect it to be.

“As of now, India is definitely much better placed than any other economy or any other market in the world. With the way the US economy is expanding gradually and with interest rates remaining low for some time, you might have these bouts of volatility from time to time,” said Vibhav Kapoor, Group Chief Investment Officer of IL&FS.

“But a very sustainable sharp correction in the Indian markets is unlikely. Investors need to keep a buy and hold sort of position in the market and hope that over the next 12 to 18 months, you will get very good returns from your portfolio,” he added.

Experts feel that India is more prepared than before to face QE tapering and the impact might not be that much. It will only be a sentimental pull back which should be used as buying opportunity by long-term investors.

“As far its impact on emerging markets, in particular India is concerned, as I said, India has made an adjustment since last year,” said Dr. Duvvuri Subbarao, Distinguished Visiting Fellow, NUS Business School.

“When QE is reversed, there will be a hiccup, there will be some capital outflow, there will be some adjustment, but that will be nothing compared to the taper tantrums we had last year,” he adds. There will be a quick adjustment through a fairly stable equilibrium I believe, added Subbarao.

Overall the market sentiment is extremely positive and given the fact that the domestic macro environment is stable and we are in the earnings upgrade cycle - things should look up.

“The next big trigger for the market could come in from the rate cut, which the market is hoping to happen in the next three to four months’ time,” said Hemang Jani, Senior Vice President, Sharekhan.

“So, overall, there could be a bit of volatility in the short run, but we think that given the strong earnings growth that we are likely to witness, there should be a good upside in this market,” he added.