Taper talk in the US has sent the first frisson through the local bond and stock markets but none of the market mavens are prepared to stick their necks out and term it a potential bloodbath event that investors need to brace for — if and when that wind-down occurs.
On Wednesday, the Federal Open Markets Commission (FOMC) put out the minutes of its April monetary policy review that signalled the US central bank could reconsider its $120 billion bond purchase programme in upcoming meetings.
‘‘A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” according to the minutes.
The hawkish tone in the FOMC minutes brought back memories of the reactionary panic in 2013 after then Federal Reserve chairman Ben Bernanke first hinted in May that year of a possible pull back from the Fed’s bond buying spree, precipitating the now famous temper tantrum.
On Thursday, the domestic markets did not react with great alarm: the Sensex fell 338 points with the stumble attributed to “weak global cues”, principally the 165-point fall in the Dow Jones Industrial Average the previous day.
The rupee — badly roiled in the temper tantrum of 2013 — did not react to the FOMC minutes at all, and in fact gained 6 paise to close at 73.12 against the dollar, continuing its month-long appreciation against the greenback.
But some experts were closely watching the situation. “The Fed minutes signalled a slowdown in bond buying at some point, marking a shift in policy in the future, which will have an implication on emerging markets,” said Vinod Nair, head of research at Geojit Financial Services.
The Federal Reserve has been purchasing $80 billion in US treasuries and $40 billion in agency mortgage-backed securities every month until substantial further progress has been made toward its ‘maximum employment and price stability goals’.
In late August 2013, the rupee plunged a record 256 basis points, going into a free fall after foreign investors dumped over $1 billion of Indian shares in eight frenzied trading sessions.
Several experts feel that India is better placed today with foreign exchange reserves of $589 billion. Moreover, it has a manageable current account deficit now; the latest data shows it at $1.74 billion at the end of December 2020 against the massive $87.8 billion in August 2013.
Meanwhile, the Reserve Bank of India is expected to persist with its accommodative policy at its next three-day review meeting scheduled to begin on June 2.
The central bank has maintained a liquidity surplus since June 2019 which is currently hovering above Rs 7 lakh crore.
G-SAP tamps yields
The RBI on Thursday offered to purchase Rs 35,000 crore of bonds as part of the second round of G-Sec Acquisition Programme or G-SAP 1.0 under which it proposes to buy Rs 1 lakh crore of government paper in the first quarter from the open markets.
The RBI received bids for Rs 1,21,696 crore against the notified amount of Rs 35,000 crore.
The cut off-yield for the benchmark 10-year security — one of the papers for which the RBI bid onThursday — was 5.95 per cent that led to the 5.85 per cent 2030 bond settling lower at 5.96 per cent in the bond market.
The RBI is committed to driving down the 10-year bond yield below 6 per cent and smoothening the yield spread between different maturities with the ulterior aim of reducing the costs of government borrowing.
