“The minutes of this week’s meeting will be released on July 7, and could give us more detail about the Fed’s tapering debate and plans. The fog over the data will not dissipate until the November meeting of the FOMC. However, a statement in November about a tapering decision in December or January may not be very much of an early warning signal. This brings us back to August (Jackson Hole) or September (FOMC meeting, with new projections),” wrote Philip Marey, senior US strategist at Rabobank International in a note.
Most Asian market equities – Nikkei, Sensex, Hang Seng and Kospi – lost ground in trade on Thursday as a result of the overnight development. The move, according to some analysts, is just a way of preparing the markets
for the day when the taper actually starts.
“The US Fed
is just prepping the markets for D-Day. That said, markets very well know that the US Fed
will have to taper once the economy improves. The date announced by the US Fed is still far away and the global markets, including India will see a knee-jerk reaction at best,” said U R Bhat, managing director at Dalton Capital.
And this is not the first time that the global financial markets have to deal with this uncertainty. Back in 2013, too, the US Fed had said it would taper off its Great Recession economic stimulus by slowing down the pace of its Treasury bond purchases. As a result, bonds sold-off and Treasury yields surged.
“From the Indian markets' perspective, the upward revision in the inflation forecast has dampened sentiment. The biggest challenge for the Reserve Bank of India (RBI) will be the recent spike in consumer and wholesale price inflation in May'21 and the skepticism about its persistence. The unexpected spike in retail inflation does add to the uncertainty for the next MPC policy in August'21,” says Madan Sabnavis, chief economist, at CARE Ratings.
According to a recent BofA Fund Manager Survey for June, 63 per cent of the global fund managers polled between June 4 to June 10 that have $667 billion in assets under management (AUM) expect US Fed to signal taper in August (38 per cent) / September (25 per cent) 2021. Of those polled, 72 per cent believe that the inflation is ‘transitory.’
Foreign institutional investors (FIIs), Bhat of Dalton believes, can look at developed markets, especially the US, once the interest rates are raised there – but all this is well into the future.
“FIIs cannot completely ignore EMs. However, India has become less prone to what they do after the retail investors tightened their grip on the markets. FII flows are likely to continue at the same pace seen now till the time actual tapering begins,” he said.
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