Friday, December 14, 2012

The latest Fed announcement and how it affects us

Two days back, the US Fed reserve announced that it would keep interest rates low till the US unemployment rates come down to 6.5% (from the current 7.7%). Typically all central banks have two key policy goals – controlling inflation and keeping unemployment low. Linking their monetary policy so explicitly with a 6.5 % unemployment rate means that the “low global interest rate regime” is here to stay for some more time. This would mean that the there would be a constant supply of liquidity globally and this would be a continuing opportunity for emerging markets including India.

We can see the effects of this excess global liquidity here already. FII’s have pumped more than $ 20 Billion into the Indian markets since Jan 2012 – the second highest amount since 1993 (when India opened its doors to FII’s). Due to this, the sensex has gone up by 20% in the last 12 months.  Easy liquidity will also help India finance its external deficit at lower costs in 2013. It also means that Govt would find it easier to mop up money through privatisation of select PSU’s.

However, easy liquidity also carries the downside of increased commodity prices especially Crude oil and Gold (these are highest import items for India).

So these are the positives and negatives of the Fed decision with regards to us in India.
Will the India Stock markets go up in 2013?
Well you decide. I will share my views about Indian stock markets in 2013 in a post closer to New Year eve.