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US "Fed Tapering" and its impact on India


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US "Fed Tapering" and its impact on India

  2. 2. • PRESENTED BY : • • • • • Twinkle Chhawda -75 Vaibhav Rokade -77 Vinit Pimputkar -79 Viraj Shah -81 Yash Sheth -83
  3. 3. contents • • • • • • • Federal reserve Basics of quantitative easing Fed tapering Market reactions Impact on dollar and rupee Impact on world economy Impact on Indian economy
  4. 4. INTRODUCTION • The word tapering in financial terms is increasingly being used to refer to the reduction of the Federal Reserve's quantitative easing, or bond buying programme. • Taper talk" started in June 2013 by Ben Bernake when speculation increased that the Fed would start on a tapered end to QE in 2014.
  5. 5. FEDERAL RESERVE • The Federal Reserve System is the central banking system of the United States • The Federal Reserve’s duties can be categorized into four general areas: • Conducting national monetary policy • Supervising and regulating banking • Maintaining financial system stability and containing systemic risk. • Providing financial services
  6. 6. GOVERNMENT BONDS • Governments and governmental agencies also use bonds to raise money. U.S. • Treasury Bonds are the most secure investments in the world because the U.S. Government backs them with its "full faith and credit.“ • Bond prices and yields are like a seesaw: when bond yields go up, prices go down, and when bond yields go down, prices go up. • In other words, a move in the 10-year Treasury yield from 2.2% to 2.6% indicates negative market conditions, while a move from 2.6% to 2.2% indicates positive market performance
  7. 7. The Basics of Quantitative Easing • The U.S. Federal Reserve (“the Fed”) plays an increasingly active role in the performance of the economy and financial markets through the use of its many tools. • The most well-known of these tools is its ability to set shortterm interest rates • The central bank enacts a low-rate policy when it wants to stimulate growth, and it maintains higher rates when it wants to contain inflation.
  8. 8. • In recent years, however, this approach ran into a problem: the Fed effectively cut rates to zero, meaning that it no longer had the ability to stimulate growth through its interest rate policy. • But even with these ultra-low rates, there's still too much unemployment. • This problem prompted the Fed to turn to the next weapon in its arsenal: quantitative easing
  9. 9. What is Quantitative Easing? • Quantitative easing is by creating money and then buying bonds or other financial assets from banks. • Higher loan growth, in turn, should make it easier to finance projects. • The Fed’s purchases help drive up the prices of bonds by reducing their supply, which causes their yields to fall. • Lower yields, in turn, provide the fuel for economic expansion by lowering borrowers’ costs.
  10. 10. “QE1” and "QE2” • In 2008 financial crisis, slow growth and high unemployment forced the Fed to stimulate the economy through its policy of quantitative easing in the interval from November 25, 2008 through March 2010. • The program had little impact initially, so the Fed announced an expansion of the program from $600 billion to $1.25 trillion on March 18, 2009. • Immediately after the program wrapped up, trouble emerged in the form of slower growth, the rise of the European debt crisis, and renewed instability in the financial markets.
  11. 11. QE-2 • The Fed moved in with a second round of quantitative easing, which became known as “QE2” and involved the purchase of $600 billion worth of short-term bonds. • This program - which Chairman Ben Bernanke first hinted at on August 27, 2010 - ran from November 2010 through June 2011. • QE2 sparked a rally in the financial markets but did little to spur sustainable economic growth.
  12. 12. QE3 Launched in September 2012 • On September 13, 2012, the U.S. Federal Reserve launched its third round of quantitative easing • It would keep short-term rates low through 2015. • These moves reflect the Fed's view that the economy still hasn't reached the point of self-sustaining growth. • The Fed has adopted what has been called "QE Infinity," a plan to purchase $85 billion of fixed-income securities per month, $40 billion of mortgage-backed securities and $45 billion of U.S. Treasuries.
  13. 13. The Case Against Quantitative Easing • The Fed’s various QE programs have led to sharp criticism from across the political spectrum. Among the arguments against quantitative easing are: • It helps banks more than the economy, since they can opt to strengthen their balance sheets by “keeping” the money rather than using it to increase their loan activity. • By creating money, the Fed makes the U.S. dollar less competitive against foreign currencies. • Increasing the money supply can create inflation.. • Quantitative easing can create “bubbles” in asset prices
  14. 14. “TAPER TALK” • Global markets started experiencing a sell off after the Fed indicated that it expected to ease its asset purchases. • On the day of Ben Bernanke's last press conference as chairman of the Federal Reserve the Federal Open Market Committee finally decided it would scale down its $85bn-amonth asset purchase programme
  15. 15. 1st Market Reaction to Tapering • While Bernanke’s tapering statement didn’t represent an immediate shift, it nonetheless frightened the markets. • Once the Fed begins to pull back on it stimulus, the markets may begin to perform more in line with economic fundamentals – which in this case, means weaker performance. • Bonds indeed sold off sharply in the wake of Bernanke's first mention of tapering, while stocks began to exhibit higher volatility than they had previously.
  16. 16. 1st Market Reaction to Tapering • The Dow was pushed down 105 points - but the idea of Fed stimulus has caused much more turmoil in certain overseas markets. • The problem: A corresponding hike in U.S. debt yields has fuelled higher borrowing costs around the globe. • This has led to the flight of cheap capital out of emerging currencies and markets. • The markets subsequently stabilized through the second half of 2013 as investors gradually grew more comfortable with the idea of a reduction in QE
  17. 17. That triggered the following reactions: • The currencies of India and Turkey fell to new all-time lows against the U.S. dollar while bond prices fell. • Indonesia's currency, the rupiah, also fell to its lowest level since 2009. • Stocks in Eastern emerging economies like Indonesia, Thailand, and the Philippines plummeted. • The Philippine Stock Exchange alone plunged nearly 6% this week.
  18. 18. EFFECT ON EMERGING MARKETS • Concerns over economic growth, along with lowered demand forecasts, have hammered export-reliant countries, like Thailand. • Thailand's SET and Indonesia's Jakarta Composite Index have fallen 18% and 20% respectively since their May peak. • The Philippine stock index is down 17%, whereas India's Sensex was down 10%. • All four of these nations' currencies are down more than 10% in that time.
  19. 19. EFFECT ON DOLLAR AND RUPEE • The dollar gained against the majority of its 16 most-traded peers when the fed decided to taper • From 53.80 a dollar on 30 April, the rupee slumped 21.84% to 68.85 on 28 August. • If tapering releases the headwinds and interest rates rise within the context of a stable U.S. economy, then capital may be attracted toward the U.S. currency.
  20. 20. Fed tapering • Fed will begin to wind down the size of its purchases before 2013 is over, with the goal of ending the program by 2015. • At the time present, QE is fluid and subject to change based on economic conditions. • This is illustrated by Fed Chairman Ben Bernanke's May 22, 2013 hint that the Fed could "taper" QE before year-end.
  21. 21. FED FINALLY TAPERS ITS STIMULUS • On December 18, 2013, the Fed announced the first tapering: beginning in January, it will reduce its purchases to $75 billion per month - $35 billion of mortgage-backed securities and $40 billion of Treasuries. • The Fed is on track to reduce the program steadily throughout 2014 as long as economic growth remains on track and unemployment continues to fall to 6.5%. • The Fed estimates that economic growth will be between 2.8 per cent and 3.2 per cent next year as against 2 per cent in 2013.
  22. 22. WHY IS FED- TAPERING • Better than expected jobs growth was one reason cited for the pullback. • They decided to decrease stimulus efforts in "measured steps" to avoid surprising markets. • They're not ending Quantitative Easing, they're just reducing it barely
  23. 23. How Will a Tapering Look? • Tapering isn’t an immediate, dramatic event. • Instead, it is likely to take place gradually throughout 2014 so as to create minimal market disruption. • Also, it is going to remain dependent on economic conditions. • The Fed may pull back slightly if the economy continues to strengthen, but it could also increase the program again if the economy slowed or the financial markets were shocked by an unforeseen crisis.
  24. 24. REACTIONS FROM MARKETS • During the summer of 2013, comments made by outgoing chairman Ben Bernanke indicating a reduction in stimulus efforts caused market volatility and a steep increase in mortgage rates. • In December, investors were more relaxed about the move. • All three US indexes posted gains of more than 25% in 2013. • European and Asian markets posted gains after the fed taper decision
  25. 25. TAPERING EFFECT ON INDIA • Sensex slips 0.73%, rupee only 1 paisa weaker vs $ the decline was moderate, as key global markets had rallied. • The market did not respond too negatively. This is because (FII) inflows are unlikely to be affected immediately. • FIIs net-bought shares worth Rs 2,264 crore.
  26. 26. TAPERING EFFECT ON INDIA • RBI said “we were better prepared to face the tapering. The good news is that the tapering has not collapsed all emerging market currencies,” • The country raised about $34 billion between September and November when the central bank opened a special concessional dollar-swap window to attract FCNR (B) deposits, adding to India’s forex reserves. • FIIs have also pumped in a little over Rs 45,000 crore since September. • Foreign exchange reserves, which had dropped to a threeyear low in early September, are now at an eight-month high of $295.7 billion.
  27. 27. STRONG DOLLAR TO IMPACT THE MARKET • The weakness in the US economy was the primary reason for easy money flowing into the Indian market. • with the US unemployment rate falling to 7 per cent the US economy is picking up. • US tapering can slow down the flow of money into our market and can put pressure on the Indian currency, which will be a dampener to our market and economy. • It's not just the rupee. • Across the global all major currencies are trading weak against the US dollar. • The dollar is gaining strength on the back of positive signals from the US economy.
  28. 28. CONCLUSION • Markets took the announcement in their stride also because of assurances from the government and the RBI. • India is now better prepared to deal with the situation arising out of a tapering of the US’ bond-purchase programme than in May 2013. • Markets will remain cautious in anticipation of a steeper tapering announcement
  29. 29. Thank you