Perspective: Federal Reserve Pumps Easy Cash Into India

Oct 04, 2013

By Saubhagya Raizada

Something strange happened on September 19th – something I had never contemplated or learnt in my 3 years of Applied Economics. The BSE Sensex surged over 750 points and the Indian rupee pulled back below 63 per dollar after the U.S. Federal Reserve stunned markets and decided not to taper (reduce) its asset-buying program. The asset buying program involves buying $US40 billion in Treasury notes (US government bonds – like govt. loans) and $US45 billion in mortgage backed securities every month.The program acts to increase money supply and keep interest rates low in the economy.

Through these bond purchases, “cheap money” enters financial markets. This money – because it is so “easy” to come by – is used by investors to take a punt on riskier and/or higher-yield assets, such as the emerging market stocks. The prices of equities (company shares) have been boosted by such quantitative easing. Some critics have said the massive influx of “cheap money” has just been a manipulation of financial markets by the Fed, and the artificial boost – when removed – could see markets and economies rediscover their financial crisis woes. But for India the effect has been that foreign investors have streamed back into the market, buying equities worth more than Rs 3,500cr, one of the biggest single-day shopping sprees so far this year.

However, investors shouldn’t get carried away, “India’s problems remain – domestic rates are way too high, inflation remains sticky, growth is weak, and the business environment remains uncertain.” Hopefully Dr. Rajan and his team will try and improve the current economic conditions.

 

Photo Credits: theshortsideoflong.blogspot.com

References: The Washington Post, ET, Reuters

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