Tag Archives: Federal Reserve System

RBI can sell upto $30bn to support rupee; may opt for NRI bond


In order to arrest rupee depreciation, the Reserve Bank of India has a capacity to sell up to $30 billion from the forex reserves and may go for an NRI bond issue to mop-up up to $20 billion, foreign brokerage Bank of America Merill Lynch said on Monday.

“We expect the RBI to eventually mobilise $20 billion via NRI bonds, a la 1998 Resurgent India Bonds and 2001 India Millennium Deposits, as the sell-off of emerging market debt should constrain the ability of FII debt limit hikes to raise forex reserves,” it said, adding that the central bank can sell upto $30 billion to support the rupee.

The BofAML report said that five year money can be raised by issuing the 7 to 9% coupon bonds to stabilise markets, just as it was done in 1998 and 2001.

The country’s banks had raised $4.8 billion and $5.5 billion from the bonds targeted at the diaspora during the economic crisis years in 1998 and 2001, respectively.

BofAML said it expects RBI to defend the Rs. 60 to a dollar level. The rupee opened 40 paise down against the dollar on Monday and was trading at Rs. 59.74 to the dollar at 2:37pm.

Every round of volatility in the rupee (the current one has been on for over three weeks now) causes a dent of up to $15 billion to the forex reserves, and considering where the reserves stand right now, RBI can sell up to $30 billion, the report said.

The selling will get the country’s import cover down to six months from the current seven months, the BofAML said.

Its strategists expect the rupee to peak at Rs. 59 to a dollar, according to the report.

RBI will start buying rupee once markets stabilise and the inflows from Unilver buy back, which would be in the region between $3 billion and $5 billion, happen,  it said.

Raising the rates is not the answer to arrest the fall in rupee, it said, noting that the differential between the $Federal Reserve’s lending rate and the RBI’s is already at a peak of 7%.


India squeezed by QE3


US Federal Reserve chairman Ben Bernanke’s comment on rolling back the monetary stimulus package couldn’t have come at a more inopportune time for the Indian economy.

The rupee has crashed to a new low, nearly touching 60 and still counting. As portfolio investors pull out funds, the slide in equity markets continues.

Blame it on QE3. It sounds like the name of a scientific project, but it is essentially a financial market jargon for the third round of quantiative easing or QE by the US central bank.

It involves a large purchase of bonds by the Fed to pump in loads of cheap money into the financial system to aid the American economy. Part of these funds came to emerging markets such as India that were still delivering returns in high double-digits a year.

The tide has since turned.

Financial investors have begun selling Indian stock since the beginning of May and with the curtains likely to come down on the US stimulus package, one can safely expect more billions to move out.

A weak rupee can also fan inflation by making fuel and other imported goods costlier. Oil companies fear that if the trend sustains for a few more days, retail prices of transport fuel would have to be hiked again, which can fan inflation.

Higher inflation will also limit the RBI’s ability to cut interest rates, dimming hopes of lower loan EMIs for individuals.

Also, the record current account deficit (CAD) may restrict the RBI’s elbow room to prop up the rupee by dipping into its $290 billion of foreign exchange reserves, enough to cover imports for seven months, analysts said.

“A reversal of capital inflows would likely wreak havoc on the rupee, as financing the CAD becomes difficult,” said Sonal Varma, economist at research firm Nomura.

“Return of foreign capital in the short term will critically depend on adopting the right policy mix to attract higher investment inflows and improve growth prospects of the economy,” said DK Joshi, chief economist, CRISIL Research.

Economy in doldrums, Manmohan takes nation back to 1990s


By Virendra Kapoor on June 23, 2013



Economy in doldrums, Manmohan takes nation back to 1990s

If you feel a sense of déjà vu, you are not alone. There are lots of Indians who might be forgiven for thinking they are back in the 1990s. Internet, invariably is the first to reflect the popular mood. A satirical message that has gone viral on the web reads:

GDP back at five percent; Dalmiya back in BCCI; Murthy back in Infosys; Nawaz Sharif back in Pakistan; Madhuri back in Bollywood; Sanjay Dutt back in jail.

Yeah, the clock seems to have been moved back, what with the rupee sinking and the foreign exchange reserves again looking vulnerable.

Plunging rupee can be revived by opening up markets

A vital part of the remedy for the 1990s’ crisis that was pressed on Narasimha Rao by the IMF-World Bank combine was to appoint a professional as Finance Minister. IG Patel said no. Manmohan Singh said yes. Much water — one may add dirty despite hundreds of crores spent by Shiela Dixit — has flown down the Yamuna bridge since those days when India had to pledge its gold with the Bank of England to tide over the forex crisis.

Rao is no longer around and the Congress leadership seems hellbent on obliterating his memory. Singh has since become Prime Minister, albeit a nominated one. Ironically, what he had managed to achieve in the 1990s under the stewardship of Rao, Singh has failed to achieve a fraction of that success under the aegis of his boss Sonia Gandhi. Blaming global factors for the economic woes is an old ploy but it fools no one. The economic mess is largely of the UPA’s own making.

Though this column is not about the state of the economy, but nonetheless, a few facts ought to alert readers about the gravity of the situation. Rupee was 45 to a dollar in early 2004. This past week it touched 60 to a dollar. That is progress for UPA. Forex reserves are about $290 billion alright, but much of it is short-term debt which can be recalled at short notice. And the trade deficit is a whopping 5.1 per cent of the GDP thanks to policy inaction and wrong-headedness on the export front. The outright ban by the Apex Court on iron ore exports following large-scale illegal mining added to the current account woes.

Admittedly, the latest run on the currency was triggered by the US Fed which is tamping down on quantity easing. But, surely, it cannot be anyone’s case that the Americans should continue to pour liquidity into the global markets so that the Indian currency does not come under pressure. The Fed took that decision following the slow but certain revival of the American economy.

UPA’s ‘success’ is just smoke and mirrors

On the other hand, the rupee has been depreciating long before the Fed announcement. And the reason is the gross neglect and mismanagement of the economy. A number of economic pundits, in fact, argue that the rupee is even now overvalued and should depreciate at least seven to eight per cent more. In other words, the intrinsic value of the rupee is about 65 to a dollar. And you know what will be the fall-out of the depreciated rupee? More hardships for the aam admi. Petrol, diesel, vegetables et al will become costlier.

Yet, all that the Government does is field its policy wonks before the media to deny the seriousness of the crisis. From P Chidambaram to his chief economic adviser, Raghuram Rajan, and that compulsive publicity hog, Montek Singh Ahluwalia, everyone seems to be engaged in talking up the rupee. If only it was so easy! Markets are a better judge of the health of the economy. When the Sensex falls more than five hundred points in a single day, it constitutes a huge vote of no-confidence in the Government’s ability to set things right.

With less than a year left before the next Parliamentary poll, the Government is hardly in a position to take tough decisions. Even if it musters the numbers in the Lok Sabha, no single legislative measure is likely to reverse the economic slide. Political drift and policy paralysis these past five years has taken a huge toll on the economy. Only a new Government with an assured majority can put the economy back on the growth path.

Where our money went wrong

Till then, the rupee would remain under pressure, the share markets would move in a narrow band, and the aam admi will have to suffer double-digit consumer inflation. The truth is the economist Manmohan Singh as PM is no patch on the economist Manmohan Singh as Finance Minister. But then you don’t have to be a leader in your own right to be a successful FM.

Tapering the Taper Talk



Peter Schiff

Friday, June 21, 2013

As usual the Federal Reserve media reaction machine has fallen for a poorly executed head fake. It has fallen for this move many times in the past, and for its efforts, it has tackled nothing but air. Yet right on cue, it took the bait once more. Somehow the takeaway from Wednesday’s release of the June Fed statement and Chairman Ben Bernanke’s press conference was that the central bank is likely to begin scaling back, or “tapering,” its $85 billion per month quantitative easing program sometime later this year, and that the program may be completely wound down by the middle of next year.

Although this scenario is about as likely as an NSA-sponsored ticker tape parade for whistle blower Edward Snowden, all of the market segments reacted as if it were a fait accompli. The stock market – convinced that it will lose the support of ultra-low, long-term interest rates and the added consumer spending that results from a nascent housing bubble – sold off in triple digits. The bond market, sensing that its biggest and busiest customer will be exiting the market, followed a similarly negative trajectory. The sell-off in government and corporate debt pushed yields up to 21 month highs. In foreign exchange markets, the dollar rallied off its four-month lows based on the belief that Fed tightening will support the currency. And lastly, the gold market, sensing that an end of quantitative easing would eliminate the inflationary fears that have partially fueled gold’s spectacular rise, sold off nearly five percent to a new two-and-a-half year low.
All of this came as a result of Bernanke’s mild commitments to begin easing back on permanent QE sometime later this year if the economy continued to improve the way he expected. The chairman did not really elaborate on what types of improvements he had seen, or how much farther those unidentified trends would need to go before he would finally pull the trigger. He was however careful to point out that any policy shift, be it for less or more quantitative easing, would not be dependent on incoming data, but on the Fed’s interpretation of that data. By stressing repeatedly that its data goalposts were “thresholds rather than triggers,” the chairman gained further latitude to pursue any stance the Fed chooses regardless of the data.
Yet the mere and obvious mention that tapering was even possible, combined with the chairman’s fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor’s problem to clean up), was enough to convince the market that the post-QE world was at hand. This conclusion is wrong.
Although many haven’t yet realized it, the financial markets are stuck in a “Waiting for Godot” era in which the change in policy that all are straining to see will never in fact arrive. Most fail to grasp the degree to which the “recovery” will stall without the $85 billion per month that the Fed is currently pumping into the economy.
What exactly has convinced the Fed that the economy is improving? From what I can tell, the evidence centered on the rise in stock and real estate prices, and the confidence and spending that follow as a result of the wealth effect. But inflated asset prices are completely dependent on QE and are likely to reverse course even before it is removed. And while it is painfully clear that expectations about QE continuance have made a far bigger impact on the stock, bond, and real estate markets than any other economic data points, many must be assuming that this dependency will soon end.
Those who hold this belief have naively described QE as the economy’s “training wheels.” (In reality the program is currently our only wheels.) They are convinced that the kindling of QE will inevitably ignite a fire in the larger economy. But the big lumber is still too dampened by debt, government spending, regulation, and high asset prices to catch fire – all we have gotten is smoke instead. A few mirrors supplied by the Fed merely completed the illusion. The larger problem of course is that even though the stimulus is the only wheels, the Fed must remove them anyways as we are cycling toward the edge of a cliff.
Although Bernanke dodged the question in his press conference, the Fed has broken the normal market for mortgage backed securities. While it’s true that the Fed only owns 14% of all outstanding MBS (the “small fraction” he referred to in the press conference), it is by far the largest purchaser of newly issued mortgage debt. What would happen to the market if the Fed were no longer buying? There are no longer enough private buyers to soak up the issuance. Those who do remain would certainly expect higher yields if the option of selling to the Fed was no longer on the table. Put bluntly, the Fed is the market right now and has been for years.
A clear-eyed look at the likely consequences of a pull-back in QE should cause an abandonment of the optimistic assumptions behind the Fed’s forecast. Interest rates are already rising rapidly based simply on the expectation of tapering. Imagine how high rates would go if the Fed actually tried to sell some of the mortgages it already owns. But the fact is the mere anticipation of such an event has already sent mortgage rates north of 4%, and without a lifeline from the Fed in the form of more QE, those rates will soon exceed 5%. This increase will greatly impact the housing market. Speculative buyers who have lifted the market will become sellers. More foreclosure will hit the market, just as higher home prices and mortgage rates price any remaining legitimate buyers out of the market. Housing prices will fall to new post bubble lows, sinking the phony recovery in the process. The wealth effect will work in reverse: spending and confidence will fall, unemployment will rise, and we will be back in recession even before the Fed begins to taper.
In fact, the rise in mortgage rates seen over the last month has already produced pain in the financial world, with banks reporting a rapid decline in refinancing applications. By the time rates hit 5%, the current rally in real estate will have screeched to a halt. With personal income and wage growth essentially stagnant, individual buyers are extremely dependent on the affordability allowed by ultra-low rates. A near 50% increase in mortgage rates, which would result from an increase in rates from 3.25% to 5.0%, would price a great many buyers out of the market. Higher rates would also cool much of the housing demand that has been coming from the private equity funds that have been a factor in pushing up real estate prices in recent years. Falling home prices would likely trigger a new wave of defaults and housing related bankruptcies that plunged the economy into recession five years ago.
A similar dynamic would occur in the market for U.S. Treasury debt. Despite Bernanke’s assurances that the Fed is not monetizing the government’s debt, the central bank has been buying nearly 70% of the new issuance in recent years. Already, rates on 10-year treasury debt have creeped up by more than 50% in less than two months to over 2.5%. Any actual decrease or cessation in buying – let alone the selling that would be needed to unwind the Fed’s multi-trillion dollar balance sheet – would place the Treasury market under extreme pressure. Since low rates are the life blood of our borrow and spend economy, it is highly likely that higher rates will lead directly to lower stock prices, lower GDP growth, and higher unemployment. Since rising asset prices and the confidence and spending they produce is the basis for Bernanke’s rosy forecast, new lows in house prices and a bear market in stocks will likely reverse those forecasts on a dime.
Lost on almost everyone is the effect higher interest rates and a slowing economy will have on federal budget deficits. As unemployment rises, tax revenues will fall and expenditures will rise. In addition, rising rates will not only make it more expensive for the Fed to finance larger deficits, it will also make it more expensive to refinance maturing debts. Furthermore, the profit checks Fannie and Freddie have been paying the Treasury will turn into bills for losses, as a new wave of foreclosures comes tumbling in.
It’s fascinating how the goal posts have moved quickly on the Fed’s playing field. Months ago the conversation focused on the “exit strategy” it would use to unwind the trillions in bonds and mortgages that it had accumulated over the last few years. Despite apparent improvements in the economy, those discussions have given way to the more modest expectations for the “tapering” of QE. I believe that we should really be expecting a “tapering” of the tapering conversations.
As a result, I expect that the Fed will continue to pantomime that an eventual Exit Strategy is preparing for a grand entrance, even as their timeline and decision criteria become ever more ambiguous. In truth, I believe that the Fed’s next big announcement will be to increase, not diminish QE. After all, Bernanke made clear in his press conference that if the economy does not perform up to his expectations, he will simply do more of what has already failed.
Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham. Investors will realize that years of QE have only exacerbated the problems it was meant to solve. When the grim reality of QE infinity sets in, the dollar will drop, gold will climb, and the real crash will finally be upon us. Buckle up.

Rupee plunges to 60 a dollar, economy in tailspin as prices spiral


Rupee plunges to 60 a dollar, economy in tailspin as prices spiral


By Gautam Mukherjee on June 20, 2013



Rupee plunges to 60 a dollar, economy in tailspin as prices spiralThe Indian currency has fallen by nearly ten rupees to the US dollar in the last couple of months to a quarter. The explanation given to us by the Chief Economic Adviser to the Finance Minister is that   the FIIs are selling their debt and repatriating the money towards the US where the Federal Reserve has indicated that it will not be taking on more debt towards the cool and cold months. The implication, despite the trillions in US borrowing is that the Federal Reserve thinks the US economy may be reviving at last. Or so thinks the outgoing Governor Ben Bernanke replete with several ifs and buts.


Rupee hits new all-time low of Rs 60 against US dollar

Meanwhile the Indian economy, like any bank facing a run on its resources, is under intense pressure. This is aggravated because our banking sector is both small and under- capitalised and not well configured to take on rapid outflows of this nature.  The rupee, like the currency of any country nowadays, is underpinned by the working economy and its fundamentals. And all parameters of these assessments are also very weak at present. So what are the consequences?

» Industry is at a near stand-still. No growth. No fresh investments to speak of.

» Exports are unable to leverage the weak rupee fast enough given the speed of its descent. In fact many exporters are caught out because of fixed price contracts in rupees wherein they cannot get the benefits of its rapid fall.

» The balance of payments is tilting sharply against us.

» The rupee is not stabilising, even at Rs. 60 to the US $. After the Finance Ministry tried talking it up, it went from Rs. 60 to the $ to 59.70 to the $, which is a very pessimistic reaction.

» The fundamentals or the potential of the economy is not enthusing the money markets and there is no confidence in the quality of our governance.

» The rupee will fall further because no structural adjustments are being made to stimulate the economy and spur infrastructure development. The Government has no big idea on how to arrest the downtrend.

» Import bills will go out of control and lead to both shortages and the wreckage of budgeted allocations, particularly for petroleum and defence purchases, both of which go into tens of thousands of crores of rupees.

» Price rises at every level, production costs, wholesale and retail price points are inevitable, as the rupee devalues spontaneously.

» This is not a temporary blip. It is indicative of a deep malaise of a mismanaged economy.

» The Government is not doing enough to stimulate growth in any direction. In fact it is paralysed and in denial.

» The rupee not just depreciating but free- falling. The exit of foreign money is a thumbs down from the globalised economy of this particular emerging market and member of BRICS.

» The Indian stock- market will take a hiding as opposed to a beating.

» An external event in the US has made a mess of our large domestic economy because of our currency volatility and lack of action to help ourselves.

» Our deficits will go out of control.

» Global rating agencies will revise our rating downwards to “Junk” status, making international borrowing difficult and even more expensive.

» If the automated devaluation brought on by the rupee makes some asset classes attractive, there may be slight recovery because of arbitrage opportunities and bottom-fishing.

» But a garage clearance sale is not what a worthwhile economy is about.

India to take steps to curb rupee deficit: Raghuram Rajan

Rupee not in shambles; will take action as warranted: Fin Min

Rupee fall temporary phenomenon: Montek Singh Ahluwalia


Market blow: India FII flows to dry as Fed eyes end to easy money


by Jun 20, 2013

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New York: The Federal Reserve will keep its monetary ‘printing press’ running a while longer, though Chairman Ben Bernanke said the central bank could start winding down its $85 billion-a-month bond-buying program later this year and end it altogether by mid-2014. That sent a chill through the US markets.

The emerging markets, including India, which have also been invigorated by the fuel of the Fed’s easy-money policies, will not take the news happily when markets open on Thursday.

US markets sold off on the news with the Dow Jones industrial average plunging 206 points, or 1.35 percent on Wednesday to close at 15,112 points.

The Fed’s plan for unwinding its bond-buying program is based on optimistic new economic forecasts for next year, including a projection that the jobless rate, which was 7.6 percent in May, will fall to 6.5 percent by end-2014.


Representational Image. Reuters

Although this is not a formal announcement, Bernanke for the first time offered a timeline for winding down the bond purchases. But tapering the program will be dependent on positive economic data, Bernanke stressed during a press conference following the Fed’s two-day policy meeting.

“Policy is in no way predetermined,” Bernanke said.

He said the wind-down could begin “later this year” if growth picks up as the Fed projects, unemployment comes down, and inflation moves closer to the central bank’s 2 percent target.

Using a car as an analogy, Bernanke said the Fed’s tightening policies will be akin to “letting up on the gas pedal as the car picks up speed.”

“The fundamentals look a little better to us,” Bernanke said. “In particular, the housing sector, which has been a drag on growth since the crisis, is now obviously a support to growth.”

Stock markets have soared for three years under Bernanke’s program and analysts are expecting a sell-off and market volatility when the Fed announces a firm date for scaling back the purchases. The Fed chief was given the “Helicopter Ben” moniker during the financial crisis when he suggested dropping money from a helicopter to fight deflation.

The US central bank has added over $3 trillion of monetary stimulus to the economy and over $1 trillion of bailout loans to financial firms since the 2008 financial crisis. This was done to prevent a widespread banking crash and help the wider economy. Part of the stock market rebound from the March 2009 lows is based on market fundamentals, but a big chunk is courtesy Helicopter Ben.

Liquidity party over for India

The Fed’s $85 billion-a-month bond-buying program, known as quantitative easing, was aimed at spurring the US economy, but for years now it has also had the effect of sending waves of inflows into high-yielding emerging markets like India. Market watchers say that an end to US monetary stimulus could lead to portfolio outflows, pushing the rupee lower and, in turn, delaying any rate cuts from the Reserve Bank of India.

“Stocks that have been overbought might see sale. Investors that are using leverage, mainly hedge funds, may also want to reduce their holdings because of the carrying cost of debt combined with the expected decline of stock prices,” Seth Freeman, CEO and chief investment officer at San Francisco-based EM Capital Management LLC, told Firstpost.

“Indian small and mid-cap stocks are going to be the most affected by the Fed’s decision to the extent of foreign investment in those stocks. It’s not going to be risk-off but risk-reduced. US investors looking at India are likely to become more selective. They will look more closely at India’s larger companies,” said Freeman, who advises foreign investors and funds on implementing investments in India. He has managed an US listed India-dedicated mutual fund that owned both large and mid-cap companies.

Foreign institutional investors have been sellers of Indian shares for six consecutive sessions, totalling Rs 3,431 crore as per exchange and regulatory data.

Freeman said the money locked into exchange-traded funds may not trade out and that might be a backstop. A slew of exchange traded funds focused on India flourished after the 2008 financial crisis as US fund managers looked East for higher yields and Americans looked for exposure to the Indian markets.

Middle-class Indians hit hard by rupee’s fall: Survey


By Udit Prasanna Mukherji, TNN | 20 Jun, 2013, 06.22PM IST
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As the Re slumps to new lows, the country's middle class has been forced to cut back on eating out, buying branded products or new cars, studying abroad etc. as their monthly expenditure has risen by 20%
As the Re slumps to new lows, the country’s middle class has been forced to cut back on eating out, buying branded products or new cars, studying abroad etc. as their monthly expenditure has risen by 20%

KOLKATA: As the Indian rupee slumps to new lows, the country’s middle class has been forced to cut back on eating out, buying branded products or new cars, studying abroad etc. as their monthly expenditure has risen by 20 per cent, a study by Assocham revealed Thursday.

The middle income group has been impacted most by inflation particularly in context of the rupee slumping to new lows and its cascading effect leading to price rise of petroleum products, edible oil, studying abroad, foreign trips, as their monthly expenditure has risen by 15-20%, according to the survey.

The quick survey was conducted by Assocham in major places like Delhi-NCR, Mumbai, Kolkata, Chennai, Ahmedabad, Hyderabad, Pune, Chandigarh, Dehradun etc. A little over 200 people were selected from each city on an average.

Earlier today, the Indian rupee slumped to another record low of 60 against the dollar after the US Federal Reserve signalled an end to its monetary stimulus that would help in further strengthening of the greenback.

Age group of respondents
Middle-class Indians hit hard by rupee's fall: Survey

“Over 92 per cent of the respondents said that their monthly bills have jumped by 15-20 per cent in the last one month – the middle class and the lower class are the worst hit,” said the survey.

According to Assocham, going to fancy restaurants has been hit the hardest with around 78 per cent of middle class Indians avoiding eating out.

In addition, 65 per cent have stopped buying foreign branded goods, while 49 per cent are spending less on home appliances and 32 per cent have put plans to buy a new car on hold.

The survey reveals that rupee depreciation impacted consumers in metros and other major cities the most vis-a-vis tier-III and semi urban areas.

However, people are in no mood to pay heed to finance minister P Chidambaram’s request not to buy gold for the sake of the health of the Indian economy.

Middle-class Indians hit hard by rupee's fall: Survey

“Despite the effort by the government to control gold imports, the Indian middle income group is bound by societal traditions and continues to buy gold even at higher prices which have increased the prices of gold due to rupee weakening”, said D S Rawat, secretary general Assocham.

Around 55 per cent of the survey respondents fall under the age bracket of 20-29 years, followed by 30-39 years (26 per cent), 40-49 years (16 per cent), 50-59 years (2 per cent) and 60-65 years.

The survey was able to target employees from 18 broad sectors, with maximum share contributed by employees from IT/ITes sector (17 per cent). After IT/ITeS sector, contribution of the survey respondents from financial services is 11 per cent. Employees working in engineering and telecom sector contributed 9 per cent and 8 per cent respectively in the questionnaire. Nearly 6 per cent of the employees belong from the market research/KPO and media background each. Management, FMCG and infrastructure sector employees share is 5 per cent each, in the total survey. Respondents from power and real estate sector contributed 4 per cent each. Employees from education and food & beverages sector provided a share of 3 per cent each.

Consumers’ growing unease is reflected in their saving and spending habits, with many middle and lower income groups indicating that they are finding ways to cut back spending now or indicating they will do so in the future, added Rawat.

The weakening rupee has made crude oil, fertilizers and iron ore, which India imports in large quantities, costlier. Though these items are not for daily consumption, they impact the finances indirectly, said Rawat.

The survey further reveals that crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its price will add to the inflationary pressure.

Assocham nationwide survey also revealed that the middle class, uncomfortable with weak rupee, are changing their overall spending habits, including money spent dining out, vacations, electronics etc.

The falling rupee will also impact itinerant Indians and vacationers to a foreign country. Air fares are going up, foreign stay will be costlier by at least 15-20% while shopping can become expensive by 12-15%. Eating out will also be costlier by 5-8%, adds the survey.

There are certainly some changes in travel patterns’ as majority of them are opting for non-dollar destinations such as Sri Lanka, Dubai, Bali and Phuket or sticking to domestic destinations such as Kashmir, Kerala and Goa, adds the Assocham survey.

As per Assocham estimates, Indian students paying fees in US currency will have to arrange for more rupee funds for the same amount of dollar fees. Since March 2012, rupee has weakened by 15%, reflecting the higher cost that students have to pay now compared to last year. Indian students who are going abroad for their higher education will see high expenditure due on their food, living expenses and stay cost.

Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will also become costlier. International food chains which run outlets in India are not denying the impact on profitability.

Assocham findings are as follows

* Average monthly expenditure has increased by 15-20%.

* 78% have decreased spending on international food chains and rest preferred on occasions.

* 65% decrease in the amount they spend on foreign brands.

* 77% per cent indicated fall in the amount they spend on foreign vacations.

* 49% plan have decreased the amount they spend on home appliances; 44% for home and personal electronics; 32% for automobiles.

Gold, silver sink on panic selling, global sell-off

By PTI | 20 Jun, 2013, 07.00PM IST
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Gold suffered sharp losses at the domestic bullion market today due to frantic selling from stockists and investors in the wake of global commodity sell-off. Gold suffered sharp losses at the domestic bullion market today due to frantic selling from stockists and investors in the wake of global commodity sell-off.
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MUMBAI: Gold suffered sharp losses at the domestic bullion market today due to frantic selling from stockists and investors in the wake of global commodity sell-off.

Sliver also crumbled under massive speculative unwinding and closed below the key Rs 44,000 per kg mark.

Standard gold of 99.5 per cent purity slumped by Rs 765 to finish at Rs 27,160 per 10 gm from Wednesday’s closing level of Rs 27,925.

Pure gold of 99.9 per cent purity plummeted by Rs 775 to end at Rs 27,295 per 10 gm from Rs 28,070.

Silver ready (.999 fineness) tanked by Rs 1,935 to conclude at Rs 43,115 per kg as against Rs 45,050 yesterday.

Globally, the yellow metal tanked to hit a 2-1/2 years low after Federal Reserve Chairman Ben Bernanke hinted at the central bank easing its monetary stimulus measures later this year against the backdrop of strengthening US economy.

The Fed’s USD 85 billion a month bond-buying programme helped gold to rally in recent years.

In Europe, spot gold was sharply down at USD 1,302.90 an ounce in early trade and spot silver lower at USD 20.17 an ounce.


Bernanke Prepares to Step Off the Gas: Why Now?

June 19, 2013

Bernanke Prepares to Step Off the Gas: Why Now?

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Ben Bernanke spooked the markets on Wednesday by confirming that the Federal Reserve is getting ready to draw down its policy of pumping tens of billions of dollars into the bond market each month—a strategy known as quantitative easing. After Bernanke spoke, the Dow closed down about two hundred points and interest rates rose slightly as the bond market sold off.

Now, a fall in the stock market of less than 1.5 per cent is nothing to worry about: over the past two years, the Dow has risen by more than twenty-five per cent. But it does raise the question of why Bernanke is choosing this moment to signal that the Fed is getting ready to step off the gas. (That’s his lame metaphor, not mine.) With the sequester still in effect, and likely to be so for the foreseeable future, fiscal policy is acting as a damper on the economy, and G.D.P. growth is still pretty modest—2.4 per cent in the first quarter of 2013 and perhaps as low as two per cent in the second quarter. Moreover, the Fed’s preferred measure of inflation is running at just 1.05 per cent, well below its target of two per cent.

In such circumstances, and with the unemployment rate still above 7.5 per cent, the central bank would normally be expected to provide as much support as possible for the economy. Indeed, some shrewd people on Wall Street expected Bernanke to rein in expectations of an early end to quantitative easing in his press conference today. But he did the opposite, saying that if the economy evolves as the Fed thinks it will, the tapering off of quantitative easing will start later this year, and the program will come to an end by middle of next year.

So why is the Fed getting ready to tighten policy? One argument, a dubious one, is that, actually, it isn’t. In keeping the federal-funds rate at close to zero and continuing to purchase bonds at a reduced rate, the central bank will still have a very expansionary stance. That’s what Bernanke argued on Wednesday. Technically, it’s true, but it ignores the impact of his statements on Wall Street. The way quantitative easing works is by giving a boost to the markets and putting downward pressure on the dollar. Now that investors know the policy is most likely coming to an end next year, they will act upon that news immediately, which could lead to a sharp fall in the stock market and a sizable increase in mortgage rates. And if either of those things happen, the Fed’s forecast of more rapid growth in the second half of this year and the first half of next year could prove to be overoptimistic.

Nobody said that managing the U.S. economy is easy, especially when the mechanism for setting fiscal policy is as dysfunctional as it is these days. The mystery is why Bernanke and his colleagues didn’t wait to see a pickup in growth before announcing their intention to change course, rather than doing it now, when the economic outlook is still pretty uncertain.

One possibility is that they are more confident about the recovery gathering pace than many other people are. In the forecasts they released today, they saw economic growth accelerating to 3.0 to 3.5 per cent next year. But that was only a bit higher than the March projection of 2.9 to 3.4 per cent. Another possibility is that policy makers are more concerned about the return of risk-taking, and the possibility of another bubble emerging, than they are letting on publicly.

The most likely explanation, though, is the simplest one. When the Fed started this latest round of quantitative easing, last September, it was worried about the possibility of another economic downturn. With the housing market recovering more strongly than many experts had expected, and consumer spending holding up pretty well despite the payroll-tax increase that took effect at the beginning of this year, that possibility has receded. To quote the statement that Bernanke and his colleagues put out Wednesday: “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

From the Fed’s point of view, quantitative easing was always a form of insurance. Now that the likelihood of a disaster has diminished, they don’t think it will be necessary for much longer. But that reasoning depends on the assumption that removing the insurance policy won’t have any significant negative effects. In the coming weeks and months, we will find out if that assumption is warranted.

Exiting from Monetary Stimulus: A Better Plan for the Fed





unconventional monetary policy

Policy Innovation Memorandum No. 30

Author: Benn Steil, Senior Fellow and Director of International Economics

Exiting from Monetary Stimulus: A Better Plan for the Fed - exiting-from-monetary-stimulus-a-better-plan-for-the-fed

Publisher Council on Foreign Relations Press

Release Date March 2013


The U.S. Federal Reserve’s monetary stimulus efforts have an undesirable side effect that needs to be managed with great care: the Fed has amassed a huge stock of mortgage-backed securities (MBS) that it will eventually want to liquidate without damaging the nascent housing recovery. What is needed to accomplish this is a relatively simple but innovative scheme whereby the Fed can, in one transaction, transform its MBS holdings into an equivalent amount of U.S. Treasury securities. Such an arrangement would allow the Fed to use conventional means of raising interest rates when inflation threatens without the worrisome economic and political consequences of selling mortgage-backed securities.

The Problem

In a sustained, extraordinary policy undertaking to counter the enduring economic headwinds of the 2008 financial crisis,
the Fed has pumped trillions of dollars of liquidity into the banking system over the past four and a half years. It has accomplished this by buying, with newly conjured dollars, a historically unprecedented amount and variety of securities. In the process, its balance sheet has ballooned from $900 billion to $3.1 trillion, and it is expected to expand further, to about $4 trillion, later this year.

At some point as the economy normalizes, most likely around 2015 according to the Fed’s current view, the Fed will wish to begin tightening monetary policy in order to prevent the exceptional level of liquidity in the banking system from feeding into inflation. It would normally do this by selling securities from its oversized balance sheet.

The big challenge the Fed will face in carrying this out, however, will be managing the economic and political impact of liquidating the huge stock of MBS it has amassed—currently amounting to nearly $1 trillion, and expected to reach $1.5 trillion by the end of the year. Doing so has the potential to drive up mortgage rates, depress house and real estate prices, and trigger intervention from policymakers reacting to aggrieved constituents.

Federal Reserve Board chairman Ben Bernanke appears to be very aware of such risks, and he has suggested that the Fed might, at least initially, use alternative means of tightening monetary conditions—not involving securities sales—when the time comes. Yet these means are likely to be less effective, as well as equally controversial.

Getting From Here to Normal

If the amount of MBS outstanding remains roughly flat over the coming year, and the Fed winds up swallowing $1.5 trillion of the total stock, it will own a massive 30 percent of the market. This is not the sort of market in which the Fed will wish to be selling securities when it judges the time right to tighten monetary conditions. Such sales have the potential to generate large and sudden falls in the price of MBS, making it costlier for banks to issue mortgages and therefore driving up their rates—rates that the Fed has worked hard to push down over the past four years.

Bernanke has been anxious to assure the markets that he has other tools in his chest for tightening monetary policy—two in particular. The first is to entice banks to move a portion of their excess monetary reserves held at the Fed to term deposits (similar to CDs), which would lock up that money for a fixed period. The second is to use “reverse repos,” in which the Fed continuously borrows money from the banks, using its Treasury securities as collateral.

Though repos are collateralized, and term deposits are not, the two tools are functionally identical. Both reduce the amount of funds banks have available to loan out, which serves the Fed’s purpose of restraining credit growth and inflation. But both also have a hidden catch: the Fed will lose control over interest rates.

If the Fed is unwilling to sell its mortgage securities in order to tighten policy, and if it is instead determined to drain a specific quantity of bank reserves through term deposits or the like, it will have to pay whatever rate the market demands. Simply put, the Fed must choose between managing the level of reserves and managing rates. It cannot do both.

Yet the Fed is unlikely to be willing to allow rates to rise as far and as fast as the market may demand in a term deposit auction. Indeed, the European Central Bank (ECB), which has carried out many such auctions since 2010, places caps on the rates it pays. In consequence, seven of its auctions have failed, meaning that the ECB failed to withdraw euros from the market despite its public pledges to do so. The Fed will lose credibility at a crucial time if it does the same.

Therefore, a conventional Fed approach to monetary tightening—selling securities from its balance sheet—is the better one, at least provided that the composition of its balance sheet does not force it to sell illiquid and sector-specific securities like MBS. The question then becomes how the Fed can normalize the composition of its balance sheet—that is, fill it completely with Treasury securities—before it needs to tighten monetary policy.

The Plan

The Fed should sell its MBS portfolio to the Treasury at face value in exchange for an actuarially equivalent amount of Treasury securities, newly issued for the purpose of facilitating the swap. The maturity of these new Treasury securities could be set either to match the expected maturity of the Fed’s MBS portfolio or to allow them to roll off at the same pace as the Fed expects it will wish to contract its balance sheet (each approach has its own technical merits). The transaction would be neutral for the size of the Fed’s balance sheet; only the composition would change.

There is a clear precedent for the Treasury doing this. The Housing and Economic Recovery Act of 2008 (HERA) gave the Treasury the authority to purchase MBS guaranteed by Fannie Mae and Freddie Mac. The Treasury started buying MBS in October 2008, stopping in December 2009 when the face value of its holdings reached $192 billion. The effect of these transactions was to transfer riskier securities from the private sector to the public sector.

In the case of the proposed Fed-Treasury securities swap, however, there is no such transfer of risk from the private sector to the public—one arm of government is merely swapping securities with another. The overall financial risk to the government as a whole remains unchanged.

Benefits Versus Costs

The benefits to the government, however, in terms of carrying out monetary policy effectively would be considerable. Instead of having to sell MBS on the market in order to soak up dollars and restrain credit growth and inflation, the Fed would be able to sell Treasury securities. The market for Treasury securities is the deepest and most liquid in the world, meaning that disruption to the market would be minimal while the impact on mortgage rates and house prices would be more moderate and less sudden than if the Fed was selling MBS. In consequence, there will also be less alarm in Congress over the possible negative economic side effects of the Fed tightening monetary policy.

Concern may be raised in Congress about the risk to the Treasury of absorbing the Fed’s MBS portfolio. Of course, the value of the securities can rise or fall as mortgage default rates and other factors change. The U.S. taxpayer will bear that risk for as long as any arm of the U.S. government holds them. Yet it is worth noting that if the Treasury buys them from the Fed at face value, it will immediately acquire a portfolio with unrealized gains of roughly $53 billion, according to the Fed’s most recently published estimate. And if the Treasury simply holds the MBS until they mature, it will avoid the losses the Fed would suffer if it were obliged to sell those same securities in an environment in which interest rates were rising (and bond prices, therefore, falling).

In short, the Fed swapping its mortgage-backed securities with the Treasury in return for Treasury securities is better for U.S. taxpayers. It preserves the value of the securities. More important, it is better for sustaining the recovery of the U.S. economy, as it affords the Fed an exit strategy from its long period of extraordinary monetary interventions that will be less disruptive to the mortgage and housing markets.

Valid concern may still be raised that the Treasury, in buying the Fed’s MBS portfolio, would be abetting the Fed in escaping responsibility for managing the necessary aftermath of its extraordinary market interventions. Bernanke has acknowledged that “the hurdle for using nontraditional policies should be higher than for traditional policies” because of the attendant costs, such as exposing the Fed to abnormally high financial risks. Yet if such costs can be off-loaded onto another arm of government, they may be insufficiently accounted for. HERA offers a template for future crisis interventions that addresses this concern—a template in which only the Treasury, and not the Fed, intervenes in markets other than those for its own securities.