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Will The US QE Impact India?

Monday, June 03, 2013

The fear that the super-loose US monetary policy of the past four years, that fuelled cheap Fed funds leading to across the board rallies amongst most asset classes and markets, could soon come to an end and could create major corrections across global asset classes, is not unfounded. So how badly will it impact India? Manik Kumar Malakar reports...

There is an overhang lurking around the corner for India’s battered economy and that is the possible winding down of the US’ Quantitative Easing (QE) programme; meaning the U.S. stimulus program is set to taper off. This programme had boosted economies across the globe and its easing will not be easy for economies, including that of India.

However, analysts believe that India is a mega-power in its own right; possible the third largest economy in the world, and has the potential to grow on her own steam although some discomfort will have to be borne through.

“India has exhibited resilience on its own in the last few years and has grown consistently on various sectors independently,” says K. Jayraman-Research Associate-Bonanza Portfolio about a possible exit of the US QE (Quantitative Easing) policy.

Following the US Fed Chairman Bernanke’s testimony, our US economics team changed its monetary policy call, says Nomura a financial company. ‘It brought forward the date it expects the Fed to start tapering QE asset purchases to the end of September from the end of 2013,’ the Nomura analysis continues.

While the exact QE date is still sometime off, its effect is already being felt. “Though economic data releases are not in any way suggesting that the Fed’s QE programme is now in its conclusive stages, recent Fed speak has sparked off significant nervousness in markets,” say Sanjay Mathur and Vaninder Singh of RBS in an Emerging Markets note. “This (Fed statement) gave rise to increased volatility in global capital markets in the recent days,” concurs Debopam Chaudhuri, VP-Research, BluFin, a financial services company.

 And there is economic worry on this front. Outside of the Philippines, the ASEAN region has suffered the largest deterioration in macro fundamentals. “India will also not be immune but much would depend on the external position when QE is tapered off,” say Mathur and Singh. “Certainly the global demand and growth largely depends on the policies of the US,” says Jayraman.

So why would the US winding down of QE affect us in India? “The majority of FIIs (Foreign Institutional Investors) are from the US and if they withdraw money from India, we have no mechanism to counter that,” explains Kishor P Ostwal, CMD, CNI Research. Already, a domestic counter balance for foreign funds is missing.  

The government especially in the recent past has started to diversify India’s trade basket away from the US. Will that work as a counter balance to the run-down in QE?

“India continues to be strongly linked to the US,” says Chaudhuri. Statistics reveal that the US is one of the top three sources of foreign remittances to India. “Also US accounts for as high as 12% of total Indian Exports and approximately 5% of total Indian imports,” he continues.

“QE winding-down can affect investments in India, but bilateral trades will not be affected much,” says Ostwal.  “India’s bilateral trade will improve in lieu of additional demand for various Indian products,” says Jayraman. This is because the weak Indian rupee will make imports more expensive which is a cause of concern. “Export oriented companies will improve while imports will be restricted owing to higher cost and to that extent the bilateral trade as well,” he continues.

And a QE easing may actually be good for India!  “In India, we believe a reduction of QE purchases would be very negative in the short-term, but should bode well over the medium-term,” say the Nomura team in their analysis.

“However, once the dust settles, we expect India would emerge stronger,” the Nomura team continues. While India has benefited from flows, excess liquidity globally has hurt the economy through elevated commodity prices, including gold, which led to high inflation, a large current account deficit, a falling savings rate and shrinking profit margins. “As normalcy returns globally, India’s macroeconomic imbalances should gradually start to correct,” the say.

“Any positive development in the US in terms of its economy is bound to have a positive trickle down impact on the Indian economy as well, is our belief,” says Chaudhuri.  If QE is withdrawn, it would mean the US economic improvement is being eyed as self- sustained which should be good news for India. “In the event of an extension, it would imply that the Fed continues its support to the US economic growth, which again would not have any negative impact on India,” Chaudhuri concludes.

QE wind down and India’s equities
Will the QE wind down affect Indian equities? “India will be affected, and there is no question of this getting factored in,” says Kishor P Ostwal of CNI Research. Thus, the recent rally is due to the fact that India had been underperforming even though global markets were at all time high.

And remember that domestic factors too move the market a lot. “India is on a threshold of growth which is hindered more by an internal policy crisis and political instability,” says K. Jayraman of Bonanza Portfolio. So what are the companies that would be the most vulnerable to the wind down? “IT and export driven companies,” says Ostwal from both the equity as well as the numbers perspective. “Also all companies where the FII holding is very high,” Ostwal continues.
QE easing and the rupee
“If US growth is tangible and broad based due to QE easing, the Indian rupee could become weaker by another 5 to 8%. However, if the Indian government, post elections maintains sound economic policy reforms, coupled with a good monsoon, the rupee could recover and stabilize at 55 levels,” says K. Jayraman of Bonanza Portfolio.

“The rupee will fall further due to increase in dollar demand,” says Kishor P Ostwal of CNI Research. However, India has sufficient dollar reserves, he notes.
The CAD effect
“A rapid fall in gold, oil and other commodity prices is setting the stage for a reduction in India’s Current Account Deficit to 4.0% of GDP, though a possible fall in the Rupee and high elasticity of gold demand in India appears to be potential minor risk,” says Debopam Chaudhuri of BluFin. “We are not very certain in the direction of foreign exchange rate, but we foresee a decline in overall volatility of the rate. Regarding Gold, we are forecasting an average decline of 2.8 - 3% its prices in India by Q3 of 2013, which should further help in reducing the Current Account Deficit,” Chaudhuri ends.

India US Bilateral Ties
India – US Trade

Trade and commerce form a crucial component of the rapidly expanding and multi-faceted relations between India and U.S. From a modest $5.6 billion in 1990, the bilateral trade in merchandise goods has increased to $62.9 billion in 2012 representing an impressive 1023.2% growth in a span of 22 years.
 India’s merchandise exports to the U.S. grew by 1.7% from $9.50 billion during the period January- March 2012 to $9.66 billion during the period January- March 2013.  US exports of merchandise to India grew by 8.89% from $4.74 billion during the period January- March 2012 to $5.17 billion during the period January- March 2013. India - U.S. bilateral merchandise trade stands at $14.83 billion during this period.

Major items of export from India to US during the period Jan. – Mar. 2013
Select major items with their percentage shares, are given below.
a)    Textiles (17.7%)
b)    Precious stones & metals (21.8%)
c)    Pharmaceutical products (11.5 %)
d)    Mineral Fuel, Oil (6.4%)
e)    Organic chemicals (6.1%)
f)     Machinery (4.7%)
g)    Iron & Steel Products  (3.6%)
h)    Electrical Machinery (3.4%)
2Major items of export from US to India
Select major items with their percentage shares, are given below
a) Precious stones & metals (28.2%)
b) Machinery (12.8%)
c) Optical instruments & equipment (6.3%)
d) Electrical machinery (6.2%)
e) Mineral Fuel, Oil etc. (5.6)
f) Aircraft, spacecraft, Parts (5.4%)
g) Organic chemicals (4.4%)
h)  Miscellaneous Chemical Products (4.0%)

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