The Market Tent and Subbarao's Camel

Dr Subbarao will hold its first quarter review of monetary policy on Tuesday the 30^th of July. The markets are complacent that he will hold the rates steady not rock the growth boat by hiking interest rates, as RBI has already stepped in twice to save the rupee.

The markets complacency stems from the numerous assurances given by the various men in authority that RBI’s late night action on 15^th July, when it hiked the MSF and sponged out the liquidity from the system, was not a prelude to the central bank hiking rate.

None other than FM himself gave this assurance. Since the action on the evening of July 15^th came after Chidambaram summoned Subbarao to Delhi the street cannot be faulted for showing some faith in what the FM has  said.

However, the anecdotal evidence does not point to the RBI holding its repo rate pat. The Repo rate is currently placed at 7.25%. The bond yields are hovering around 8.16%.

The recent treasury auctions saw firming up of the yields. The Government is probably harping on the hopes of a successful bond issue to tide over the current problems. Going by the recent experiences the yield is likely to be higher.

Dr Subbarao, whose two year extension comes to an end on September 4, is likely to hike rates, if he has not been offered an extension but may hold back the urge in case hints have been dropped. The reason I am saying this is because Dr Subbarao has so far stood his ground against the public utterances of the FM as to what the RBI should do. In case this is his last policy he would like to hike rates and leave his stamp. But in case it isn’t, he will have all the time and elbow room to wait and watch.

The RBI is in a classic dilemma. If it hikes rates, it can save the currency. But the high rates will surely hit growth. The FII equity investors may sell and hit the currency. So it could be back to square one.

The rising yield will also trigger mark to market losses for the banks in their bond portfolio. Banks hold around 28% of their deposits in bonds. The banks are not required to provide for any mark to mark losses on the bonds which they want to hold till their maturity(HTM) . So the banks will suffer on their Available for Sale (AFS) portfolio.

Let’s come back to our earlier point of the assurances given by the FM that these steps  ( hike in MSF and sponging out of liquidity) are temporary in nature. If these were indeed short term, of a few weeks duration, then the RBI should signal their end and give a time frame of their withdrawal. 

The RBI is unlikely to oblige.

While I  don’t know  about those living on Mars, those dwelling on the planet earth should not even think that RBI will give you a time frame. It just can afford to tell us that these  measures will be in place as long as the volatility in the Rupee remains. Now go out and decipher what this means.

I am reminded about an anecdote from the medieval times.

Incumbents of a camp complained of no room to move about in the tent to their leader. The leader assured them of help the day after if they agreed to accommodate a camel just for the night. People made way for the camel to the ushered in. The next morning the leader simply took out the camel and camp heaved a sigh of relief.

Dr Subbarao is unlikely to take the camel out in a hurry.

The CURIOUS CASE of Bayer CropScience BUY BACK

The Board of Bayer Cropscience made an open offer to buy back 2,879,746 equity shares of Rs 10 each from all shareholders of the company at a price of Rs 1,580 per share. This aggregates to around Rs 455 crore.

The stock price of the company, which had closed at Rs 1748.95 on Monday, tumbled 8.65% to Rs 1597.65 on Tuesday after the announcement, as the indicative buy back price was lower than the prevailing market price.

While this is being seen as pure buyback by the company, it is in fact a back door attempt to raise the stake of the promoters to 75% using the company resources.

It is perfectly legal to do a buyback of shares. And promoters have used in the past to indirectly hike their stake by resorting to buyback.

Let’s take an example of a company, which has an equity capital of Rs 100 crore with promoters holding at 55% and Public holding at 45%. The company then makes an open offer to buy back 25% of its equity capital. After the buyback, the company’s equity capital will reduce by Rs 25 crore to 75 crore, if the promoters do not participate.  Their shareholding in the company would go up to 73.33% from the 55%. The public shareholding will come down to 26.67%.

Investors should note, the company’s cash has been used for this but the promoter’s equity share holding percentage has gone up from 55% to 73.33%. From a shareholder’s perspective, this is seen as an investor friendly move on two counts:

·         He gets an exit.

·         The EPS of the company goes up as the number of shares gets reduced.

But for Bayer Cropscience shareholders, the buyback price wasn’t attractive as it came at a discount to the prevailing market price. The company could very well have come out with a higher buy back price.

This is also not keeping in line with the current trend of the market where MNCs are raising their stakes at a premium to the market price. Remember Hindustan Unilever, where the Anglo-Dutch parent offered to raise its stake in the company to 75% at a premium of more than 22% to the then prevailing market price. 

GSK Consumer had offered to raise its stake at a 39% premium to the prevailing market price.

Bayer may say that we are not raising our stake as promoters may also participate in the buy back. If everyone participates, then the share holding pattern will not change. The company is right.

Let’s understand the math here.

The buyback of 28.8 lakh shares of the company represent just 7.29% shares. If the promoters don’t tender, their shareholding will go up to 77.10%.  This will exceed the permitted promoter holding limit of 75% and an OFS will have to follow later.

Our sense is that promoters have retained the right to participate in the buyback just to ensure that they can sell the desired amount of shares, which will be just enough to ensure that the promoter’s stake is within the 75% permissible limit.

So this is nothing but a back door way of raising the promoter’s stake. And this is being done at a lower price than what the market price was. This is not an investor friendly measure. The company is flushed with funds after the Thane Land sale last year. The price could very well have been higher. After all the company was only using shareholders’ funds for that.

Written by VK Sharma

TWO POSITIVE SIGNALS FROM THE ORIENT

During the weekend, two developments in China and Japan have happened, which on paper at least augur well for the markets.

1.   China frees lending rates

Late last Friday, People’s Bank of China announced that it would scrap controls on lending rates and let banks price their loans by themselves.

The expectations were that the central bank would reduce rates but no one had expected the central bank to take out the floor. Earlier banks could not charge less than 30% of the benchmark rate set by the central bank.

This means that companies could get access to cheaper loans and profitability of companies could become better.

While the lending rates have been freed, the deposit rates still continue to be governed by the central bank. Currently banks in China cannot offer rates that are more than 10 percent above the PBOC-set deposit rates. Currently one year deposit rate is 3%.

Banks have so far enjoyed cheap funding. The day the deposit rates are freed, the banks will see erosion in their margins. So this is unlikely to happen quickly.   

Readers would recall that liquidity crisis had almost brought down China’s largest bank, ICBC. Another bank, Bank of China had almost reached the brink, before central bank aid pulled it out.

One of the reasons Why the Chinese Central Bank has not freed deposit rates is that a huge deluge of money will come in seeking higher rates, making currency rate management an issue.

One paper the reduction in rates is positive but will not work unless deposit rates are freed too.

2.   Japan: Abe’s party wins the upper house

Premier’s Abe’s part, LDP, is likely to gain majority in the upper house of the Parliament, exit polls suggest. LDP already has a majority in the lower house of the Parliament.

This will empower the Prime Minister Abe to carry out his mandate. Ahead of the elections, there was a 60% approval rating for Abe’s monetary easing and fiscal spending.

The parliamentary grid lock that has prevented previous governments from taking tough action has now ended. LDP should not only be able to move ahead with its easing but also take some unpopular steps that are necessary for the economy.

 Among the contentious issues that the premier will now have to navigate with majorities in both houses is the Trans-Pacific Partnership free trade talks that Japan will join this week. Abe has vowed to maintain a range of agricultural tariffs to protect Japan’s farmers.

With a larger majority under his belt, Abe could now flex his muscles on some of the contentious issues like reinterpretation of the constitution to end a self-imposed ban on exercising the right of collective self-defence.

Japan could move to acquire the capability to attack enemy bases when an attack is imminent and no other options exist. It could also move forward to create Marines division to protect remote islands.

For the Japanese markets, the development is good as the ruling party now has majority in both the houses.

MIDNIGHT SUMMERSAULT BY RBI

  

In a move that will rattle the equity markets on Tuesday morning, the RBI took  a series of steps that will seriously reduce the liquidity in the system and raise the costs of borrowing for banks.

The RBI will now

1.   Prevent Banking system’s access  to easy money  and thereby prevent speculation in foreign currency.

2.   Effectively increase borrowing costs

3.   Will STOP  buying of bonds

4.   And now START selling bonds.

5.   Sell bonds worth Rs 12,000 cr on 17^th July in the secondary market to pump out liquidity

6.   Fix the borrowing limit for banks at 1% of the system’s net demand and time liabilities

7.   Limit the borrowing of  the system at Rs.75,000 crore . It will take effect from 17 July.

The move came after FM returned empty handed form the U.S. The Rupee, which had fallen to 61.21 to a dollar earlier this month, recouped some of its losses when the RBI and SEBI ordered pruning of positions in forex trading and disallowed banks from proprietary trading. While some of these measures are yet to take full effect, the Rupee’s renewed slide worried the central bank to come out again with a knife Monday late night.

The banks hold bond reserves which are more than 5% over and above the statutory minimum of 23%. These bonds are pledged to the RBI when the banks need overnight funds. The capping of this limit means the banks will now be forced to borrow at a higher rate form the RBI under the MSF.

The rate of MSF, which was 1% over the Repo rate of 7.25% have now been hiked to 10.25%. The banks, which had so far not touched the MSF, will now have no option but to borrow at higher rates.

The hike in MSF is clearly to make the cost of carry over dollar more expensive. This is an indirect measure to boost the rupee as speculators will have to shell out higher rates for their speculation.

One line message to the markets: Rates are headed higher

Also the following is likely to happen

1.   Rupee will strengthen

2.   This could in fact later on go on to support the market

3.   Bonds Yields will harden

4.   Markets will take a hit in the morning

5.   The PSU Banks could suffer again. Interest sensitives will across the board take a hit

6.   Corporate profitability will fall

7.   Earnings could be pruned down

RBI hikes MSF & Bank rates

In late night action, when the pot-bellied Dalal Street brokers were just getting into their beds Monday night, RBI quietly announced hike in the MSF rate and the Bank Rate.

The Marginal Standing Facility is the rate at which the Banks can borrow from the Central Bank against Government Securities. It was hiked by 200 basis points to 10.25%.

The Bank Rate, which was at 8.25%, was also hiked by 200 basis points to 10.25%.

The move is aimed at stabilising the rupee. The Bonds could sell off and see a rise in the yield. The Rupee could appreciate.

The markets are likely to be rudely surprised.

Get ready for higher interests rate now and more pain for the markets Tuesday morning.

Don't lose Faith-Stick to SIP Investments



Discipline is Rewarding even in Money matters



Equity market investors are a bundle of nerves today. With the tumbling rupee, not so encouraging global cues and shaky macro economic fundamentals, most equity investors are clueless about the future direction of the equity markets. 

Time has come to refresh the most important lesson on investing in equities. 

“It pays to spend more time in the market than timing the market.” 

Whenever you decide to buy a stock, the markets on the rise and when you want to sell it, the market goes into a tailspin. Sounds like a similar story?

A disciplined investment strategy such as Systematic Investment Planning (SIP) helps you beat the fallacy of timing the market. 

In the recent times, SIP has become a popular method of investing in mutual funds. Apart from SIPs in mutual funds, today investors have the option to do SIPs in stocks and Exchange Traded Funds (ETFs). 

How SIP helps you build Wealth

Let us understand this with an example. If you had invested Rs 5000 every month to buy ITC* shares for 10 years, you would have accumulated around Rs 28.6 lakhs even as the investment amount was much lower at Rs 6 lakhs. 

How did this happen? In financial jargon, it called as Rupee Cost Averaging (RCA). 

You bought ITC stock at fixed points in time irrespective of its price levels. The monthly approach ensured you bought more stocks when the price was lower and fewer stocks at higher prices. As a result, the cost per stock reduced over a period of time. The bigger advantage is, it eliminated the risk of investing a lump sum amount at a wrong time. 

SIP vs Lumpsum Investments

It is like comparing apples to oranges. 

Don’t compare lump-sum investments and SIPs. It is not about which investment strategy scores over the other. They are both very investment strategies although the underlying financial instrument is equity. 

When you invest the entire sum at one go and leave it untouched for 7-8 years, the compounding effect will be higher given the sheer size of the corpus. 

SIP is convenient and lighter on your pocket especially in today’s time when most individuals are saddled by EMI commitments. It gives you an opportunity to save small amounts every month, which can build a huge corpus over a period of time. 

Why SIPs are investor friendly? 

-If you are a salaried individual with a regular income and monthly EMIs, SIPs are the best bet. It allows you to invest as low as Rs 500 every month.

-The disciplined strategy gives you an opportunity to invest at lower levels given the higher frequency of the investment. 

-You are investing a small sum every month. This corpus will grow big over long-term due to compounding effect. 

-Your purchase cost of the asset becomes much lower since you are buying at all price levels. 

You have a financial goal? But don’t have the money to invest today. Start Small and do a SIP. Increase the Investment amount in a staggered manner.

Disclaimer: The above calculation is for the purpose of illustration only. 

WHAT THE U.S. NON-FARM PAYROLLS DATA MEANS FOR OUR MARKETS

On Friday evening India time, the much awaited  U.S. Non-Farm Payroll (NFP) numbers  were released in the U.S.

We will look at that data, take a stock of  how it influenced other asset classes in the U.S. and then  figure it out how it could impact our markets on Monday.

First the data

The Bureau of Labor Statistics reported that June NFP  rose by 195,000. This number is better than expected. The economists had pencilled in a smaller number of 1,65,000, which was even lower than the May figure of 1,75,000.

Not only the June number was higher than expectations, it also revised the May number of 1,75,000  to 1,95,000.  

The second piece of economic data that comes along with the NFP is the Unemployment rate. This came in unchanged at 7.6%.  

The normal question that comes to the mind is that if more jobs have been created, why hasn’t the unemployment rate come down? 

  Let me answer that for you.

The NFP data and the Unemployment rate are released by different government agencies. The NFP is issued by the Bureau of Labor Statistics and the Unemployment Rate is taken from the household survey. So they are capable of painting a different picture.

How the American markets reacted

The Dollar gained 0.74% against a basket of 6 currencies. The British pound and the Euro, which had weakened on Thursday on a dovish view of the Bank of England and the European Central Bank sank again against the dollar.

The 10-year Treasury fell in response and the yield promptly rose 22 basis points to 2.72%. This was the largest one-day move in yields this year.The mortgage originators promptly raised the interest rate on their loans by 0.25%.

Crude oil futures for the August contract rose $1.98, or nearly 2%, to settle at $103.22 a barrel. This is  the highest close for the commodity since May 2012, when it had closed at  $105.22 per barrel. This was largely on account of the state of emergency in the Suez and Sinai provinces, through which Suez Canal and a pipeline that transports oil passes.  

The Dow closed with gains of 147 points at 15,136, rising 0.98%. Both the S&P 500 and the Nasdaq also surged more than 1%.

How would our markets respond

The first reaction would be to say that in line with the international markets, our markets would also rise. 

How the markets actually pan out is a complex issue. We will come to that but before first let’s have a look at how the other asset classes will behave.

The currency is going to be the first casualty of the Dollar strength. The Rupee will depreciate further from Friday’s close of 60.23. It is likely to make a new  life time low as the earlier intra-day low of 60.75 gets challenged in the opening trade itself.  

The yields on the 10 year paper  are likely to rise further. In fact, yields were already on the rise on Friday. The yield had increased to 7.5% on Friday from 7.42% on Thursday.

The FIIs who have invested in the debt market will feel the ground slipping below their feet as their investments lose value and currency heads south. The rise in the US 10 year yields will further put pressure on the yields here, which in turn would weaken the currency.

A weak currency is both a cause and also the effect of rise in bond yields.

The weak currency is also likely to trigger reconsideration amongst the FIIs invested in the equity segment whether to call it quits now or risk further deterioration.

Though the Nymex crude has closed at $103.22, we are paying more price in Rupee terms than what we paid when crude was at an all-time high of $147 a barrel in 2008, courtesy a weak rupee.

In this scenario of high crude prices and a weakening Rupee, it is difficult to visualise  our markets doing well. In case they do well, it might be a good idea to lighten commitments.

Filter the Noise: Get the Big Picture Right in Money Matters

Paul Samuelson, a noted American Economist, once said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." 

Grow Your Money with the Right Asset Mix

The underlying message here is don’t let yourself swing between euphoria to depression every time your portfolio reacts to fluctuations in equity, bullion or currency markets.  Asset classes will fluctuate. On one hand, you can't stop investing because you have to meet your financial goals. On the other hand, your portfolio cannot be immune to its volatility. However, you can mitigate the impact by giving the right mix of assets to your portfolio

Asset allocation

Asset allocation is a technique through which you can balance the risk and reward quotients of your investment portfolio. You can allocate your money into different asset classes such as equity (stocks, mutual funds, derivatives), fixed income (bonds, FDs etc), real estate, gold etc.

The logic is each of this asset class has different levels of return and risk. If the value of one asset appreciates at a point of time, the value of another asset may be depreciating at the same time.

There is no standard rule for asset allocation. The percentage allocation of funds to various assets varies from individual to individual based on their age, goals and risk appetite

Wealth Creation

In you 20s and 30s, wealth creation should be you priority. This will give you a good financial base for funding downpayment of her future house, buy a car and also do a foreign holiday. This is the stage in which you can invest 70% of your portfolio in stocks and equity mutual funds as they beat inflation.

Action Plan: 

1) Allocate 30% of your take home salary towards SIPs in equity mutual funds or SIPs in direct stocks. A systematic investment strategy will help you tide over volatile markets

2) Use your annual payouts such bonus to invest in quality stocks

3) You can do SIPs in Gold ETFs to hedge your portfolio against inflation

Wealth Accumulation and Protection

Once you take a plunge into big commitments such as purchase of a house, marriage, parenthood or support your dependent parents, you have to add a hint of protection to your portfolio.

What you can consider?

1) Buy term insurance to protect your dependents. Nowadays, you can buy term covers online and save up to 30% of the premium cost as compared to offline policies.

2) You can add fixed income products such as fixed deposits, NCDs, bonds to your portfolio. This will stability to your portfolio.

3) Buy a family floater health insurance to cover your family and another health policy for her parents. You can seek a tax benefit of up to Rs 30,000 under Section 80 D on premium payments for health insurance policies. This benefit is over and above the 1 lakh tax benefit available under Section 80 C.

Wealth Preservation and Retirement Planning

Child’s education, marriage and your retirement are some important goals as you age. Just to give you an idea, if your monthly expense, as of today, is Rs 30,000, you will require Rs 1.39 lakh after 20 years just to foot your monthly expenses, if the inflation grows at an annual rate of 8%. This money will just suffice to maintain your current lifestyle. Retirement Planning is all about, knowing your real retirement costs, building a kitty by investing prudently and having a systematic withdrawal plan from your kitty post retirement.

What you can consider?

1) For your child’s education and marriage, you should move some of your equity investments into fixed income products with fixed maturities such as Company FDs, NCDs and bonds. This will ensure capital protection and you will earn a fixed return. The maturity of the investment should be in sync with the fund requirement.

2) Government of India (through PFRDA) initiated National Pension System (NPS)- a contribution scheme, which helps you build a retirement corpus in a systematic manner during your working life. On retirement, you can withdraw up to 60% of the corpus as lump sum amount. The balance will be saved in form of annuities, which comes back to you as a monthly pension. You even have the option of taking the entire corpus as a monthly pension.

Watch this man – Mark Carney

Just four days into his office as the Governor of Bank of England, Mark Carney has left an indelible mark on the  Bank of England (BOE).

The first foreigner to be appointed as the Governor of the 319 year old institution, Mark Carney stood out from day one as he took the tube to work like a commoner.  Carney is a citizen of Canada and was the head of the Canadian Central Bank before crossing the Atlantic.

On Thursday, the Monetary Policy Committee (MPC) of the Bank of England held the interest rates steady and issued a statement that it normally does not do.

The usual note would include the rate of interest and any change in the QE that the bank has planned. But this time there was a commentary on the state of the economy, something that the BOE has never done earlier. He said that “in the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time,” .

He has promised to make a second deviation from the past at the next meeting in August. And that is to give guidance on rates. He will write to the Chancellor of the Exchequer to explore this possibility.

The markets were positively surprised by these developments.

The FTSE 100 rocketed up 3.1% to 6,421.67. The sharp rebound came on the heels of a 1.3% drop in the FTSE on Wednesday. 

The Stoxx Europe 600 index climbed 3% as Draghi promised to hold rates for a considerable period of time or even go lower if the situation so demanded.

The British pound dropped 1.3% against the U.S. dollar to $1.50710, which was the biggest drop since February. The Euro also weakened against the Dollar.

Transatlantic rift in views

The U.S. Federal Reserve and the duo of ECB and BOE are in fact on different shores of the pond, physically and even in their policies.

While the Fed is in the process of taking the first step on the long road of unwinding the easy money policy, both the BOE and the ECB are assuring their economies that they are willing to hold rates low for a considerable period of time.

The difference in approach is understandable as they are in different stages of recovery. The EU has its own problems to cater to in the form of troubling peripheral countries, the UK has just averted a recession. Its economy grew by a meagre 0.3% in the first quarter of this year.

But the collective wisdom of the two  head of Central banks to promise continued lower rates for some time to come gives the market bulls a straw to cling on to their bullish bets, though it may not in any way impact the thinking of the U.S. Fed which any way will give importance to its own economic data.

Carney will shine

Unlike the U.S. Federal Reserve or the ECB, the BOE Governor is  relatively short on ammunition. He cannot fire from the hip as Bernanke can or Draghi can to a certain extent.

But take it from me that what he lacks in financial strength, he will make up with his intelligence and use of words.

Central Bank trackers have one more character to watch for

Tied to the Apron Strings of the Fed

By the time the year 2013 gets over, the traders and investors would have got first class lessons in fiscal deficits, Central Bank actions and their impact on the currencies and stock markets.  We are saying this because those who do not appreciate the evolving relationship will have to go into forced hibernation.
Our biggest risk at this point of time is the depreciating currency.  The Rupee, which quoted at 53.74 to the U.S. Dollar on 2nd of May, 2013 rocketed to 60.59 by 27th of June. This 12.75% depreciation in a matter of little under two month time does not augur well for the currency, debt or equity markets.

We are weaker than 2008 

The situation today on the foreign debt front is weaker than what it was in the year 2008. At that time, we needed to repay or roll over just $ 54.7 Billion. This represented just 17% of our forex reserves.  Today we need to pay $ 172 billion before March 2014. This makes the one year repayable debt as  60% of the forex reserves.
The current account deficit (CAD) at that time was just  2.5% of our GDP. Today CAD is 5% of the GDP.

Weak Rupee will also hurt rollover of  Foreign Currency debt

We have to repay $ 172 billion before March 2014. Such debts are usually rolled over. We should be able to roll over this debt. But the problems will arise with the rates. With a weakening currency the lenders will demand their pound of flesh in terms of higher yields. The cost of servicing this debt is likely to go up.

 Fiscal Deficit is rising 

The Fiscal deficit during the April-May period shot up to Rs 1,80,691 Cr. To give you a perspective, this is almost 33.3% of the full year’s budgeted deficit of Rs 5,42,499 Cr. If the fiscal deficit continues this way, we would have consumed the entire year’s quota  just six months into the financial year by September 2013.
Last year in the same period, the fiscal deficit was 27.6%.
One of the contributory reasons for the larger fiscal deficit is that Government’s  receipts stood at 3.3% of the budget estimates  this year  as against 5.5% in same period last  fiscal. Corporate tax collections were negative for the period as refunds were higher than the mop up. The excise duty collections were also lower by 37% from last year.
One hope is that the Government will not cut down on expenditure as it did last year. The Government will go out and do the planned expenditure as scheduled but will try and cut non-planned expenditure, which might catalyse growth.

Fed easing has fuelled emerging markets

In order to stimulate its own economy, the Federal Reserve embarked on the easy money policy that entailed lower rates and enough liquidity in the system. For  more than 4 years now the rates in the U.S. have remained near zero. The easy and low cost money soon found its way into the markets and part of it in the emerging markets.
The continued low rates and easy money enabled the Dow and the S&P 500 to reach life time high figures in May earlier this year.

Fed signals tapering 

On June 18 , the Fed finally said that it would begin to taper its bond buying programme.  The Fed has been buying $ 85 billion worth of bonds every month. This has been the Fed’s strategy to keep the markets well supplied with liquidity.
We all know what happened there after. Barring the U.S. Dollar, all asset classes be it Equity, Bonds, Commodities, Precious metals and currencies were beaten with a sledge hammer across all markets and geographies.
This was waiting to happen. Ever since the Fed began its QE3 in October last year, it was known that emerging markets were partying on borrowed times. Whenever the Fed music will stop, the emerging markets will sell off.

22nd May is the water shed

While this worry had been on the mind of the investors for a long time, it really caught the fancy of the markets when the minutes of the April 30 FOMC meeting were released on May 22. The minutes showed that some members had urged that Fed begin tightening its stand from the June meeting itself.
May 22 has been a watershed day in the global markets because volatility has increased since then across all asset classes. The yield on the US – 10 year, which was quoting at 1.94% on May 21 jumped to 2.25 on the eve of the FOMC meeting and it closed the month of June at 2.51%.

Fed stirs up the hornet’s nest 

The mere expectation that the Fed could consider slowing its stimulus programme has sent the bond yields in the U.S. higher. This has changed the equations for the FIIs who invest in the debt market in India. While the Repo rate cuts by the RBI have not been passed on to the Indian borrowers, the yields of the bond holders have been shaved. As a result the FIIs find the Indian bonds not worth their while considering the risk they entail.
Till 21st May, the FIIs had invested Rs 30,471 Cr in the Debt market in the calendar year 2013. As of Friday 28th  June, the figure stands at minus Rs 9,089 Cr. In other words, since May 2013 they have sold off more than what they had earlier bought in the whole year. No wonder the Rupee has seen a life time low last week.

Why did Bernanke hint at tapering

Ben Bernanke, who’s second four year term ends in January 2014, will probably hang up his gloves at the Fed. It first  became clear that Bernanke has no intentions of going for a third term at the Fed when he spoke at Princeton University earlier this year. It became further clear when he made it known that he is not coming for the Jackson Hole Symposium, where the Fed Chairman necessarily presides. It became known to the world that Bernanke will be replaced when President Obama said in a rather unbecoming way that he had stayed longer at the Fed than he(Bernanke) had hoped  to stay.
Bernanke, who’s PhD thesis was on Great Depression,  was nicknamed as Helicopter Bernanke’ after his 2002 speech where he spoke on "Deflation: Making Sure It Doesn't Happen Here". He referred to economist Milton Friedman's idea of a "helicopter drop" of money into the economy.
Since Bernanke initiated the easy money policy it was only appropriate that he at least signal a winding up of this easy money policy before his retirement. That may have been the reason to actually say what he said on June 18. Having signalled now, even if the Fed does not, he has done his duty and history will record that.

FOMC is the only hope

The Fed Open Market Committee ( FOMC), the policy making arm of the U.S. Federal Reserve, will decide when and how much to taper. The Fed has clearly laid down two targets of Full Employment and Inflation. The Fed sees full employment  if the Unemployment rate falls to 6.5%. Currently the rate is 7.6%. Inflation target is 2%. Currently it is at 0.74, which is very low.
The FOMC will decide on tapering based on the incoming data. The numerous FOMC members have given their version of what they think the Fed might do, prompting an economist to call the FOMC as the  Fed ‘Open Mouth’ Committee. These speeches by the FOMC members have added more confusion to the possible Fed action.
We have said earlier that the Fed policy is not cast in iron. It can change on the basis of data. The only hope that we in India have is that the data coming out of the U.S. is tame enough to allow the U.S. Fed to keep its pedal pressed  on the gas of liquidity so that emerging markets in general and India in particular could breathe easy.
Our fate is tied to the apron strings of the U.S. Fed.
But if the surging yields on Government paper both here and in the U.S. are any indication, it is clear that the days of low rates are numbered and we should brace for higher interest rates.