Bernanke just upsets the apple cart of Indian Open market economy!

Bernanke just upsets the apple cart of Indian Open market economy!

Palash Biswas

Bernanke,the chairman of the US Federal Reserve just upsets the apple cart of Indian Open market economy!Ben Bernanke, Federal Reserve chairman, speaks during a news conference in Washington. Bernanke hasn't said he'll leave in January, when his second term ends. But he's widely expected to step down then.More shock waves waited.Benchmark oil prices are set to decline further this week after the US Federal Reserve Chairman Ben Bernanke put markets on notice last Thursday that they will be weaned off the "easy-money" policies that have been so central to supporting risk assets such as commodities.More over, China's Big Bubble has to blast on the fces of the corporate policy makers at home. We have just opened the floodgates of all types of virus elements just to carry on the fraud of free oreign capital inflow based policy making devoid of any fiscal management at all and destroyed the production system. Continuity of economic policies since 1991,in fact, has undermined both industrial and agrarian growth. Commodity market, capital goods, service sector and outsourcing have taken over the economy. And here you are, in a twist of moods of Ben Barnanke threw the bunch of Indian Finance managers into deep sea.Ironically, there is a glimpse of hope, of course, as now that rupee has depreciated so much export demand would pick up with a lag and imports would find difficult to come through, providing protection to domestic companies.Rupee's unprecedented fall against dollar may be worrying economy pundits, but experts still  believe some good may actually come out of this bizarre situation.The expert opinion has nothing to do with the masses as it suggests that now that rupee has depreciated so much export demand would pick up with a lag and imports would find difficult to come through, providing protection to domestic companies. Profitability of some sectors may actually improve after rupee depreciation. The only way to revive growth now is to get rid of policy inaction. It means furthrer hard drive for econonic reforms second generationalmost stumbling thanks to political turmoil just before the Loksabha elections.

The rupee breached formidable resistance of 60 to the dollar to slump to a record low on Wednesday, reinforcing the vulnerability of a country with limited reserves and struggling to narrow a record-high current account deficit.The RBI is seen lacking fire power because it does not have reserves and there is "short rupee" in the system.

With the rupee touching 60 on Wednesday, Moses Harding, IndusInd Bank, head - ALCO and economic & market research says the reason behind the sharp drop in the currency was the extended rally in the dollar index. He says that there is risk of the rupee extending its fall and touching 61.5-62 levels.The Reserve Bank of India (RBI) finally threw in the towel today. Over the past several days it had been selling dollars in the foreign exchange market and had thus managed to hold back the rupee to under 60 to a dollar.The BSE Sensex fell on Wednesday as blue chips such as Tata Motors declined after the rupee slumped to a record low, escalating worries that foreign investors may exacerbate outflows and dimming chances of a rate cut by the Reserve Bank of India.

Easy money policy ultimately inflicted Indian economy.The Indian rupee hit another record low Wednesday, slipping below the psychological resistance level of 60 against a dollar, due to high month-end demand for the US currency by importers and sustained outflow of money. The dollar linked money making machine is just jammed as the chairman of the US Federal Reserve would suck back the liquidity he had been so generously providing to the United States and the rest of the world created uncertainty and panic. Indian economic policy makers have watched with frustration and helplessness.The Indian currency also remained under pressure following reports of the dollar continuing its upward march against other leading currencies for the sixth straight dayThe Indian rupee on Wednesday closed at an all time low 60.71 against the US dollar after slumping to a record intra-day low 60.76/USD. Dollar buying by two large public sector units (PSUs) including REC and GAIL created additional pressure on the local currency to touch historic lows against the greenback.The Reserve Bank of India (RBI) on Tuesday discontinued the facility of external commercial borrowings (ECBs) in renminbi, the Chinese currency. Indian companies in the infrastructure sector were allowed to avail this fund raising route subject to a maximum of cap of USD one billion.The central bank had introduced this facility on September 27, 2011. It represented business opportunities for Chinese lenders and was supposed to boost bilateral trade between China and India.  Currently, one yuan, the other name of renminbi, is equal to Rs 9.71.

Stocks worldwide fell after Federal Reserve Chairman Ben Bernanke's June 19 statement on U.S. monetary policy. Emerging markets were hit especially hard. The statement, and Bernanke's comments afterward, shouldn't have come as a surprise — so what's going on? Was the sell-off a meaningless overreaction, or a warning of new financial stresses ahead?A bit of both. Bernanke said the Fed's program of quantitative easing would be reduced over the next year or so, and probably ended in 2014 — so long as the economy continued to strengthen as the Fed expects. He also repeated his plan to keep short-term interest rates on the floor for longer than that. Again, none of this was unexpected. It would have been shocking if he'd said anything else.

The Federal Reserve under chairman Ben S. Bernanke has committed itself to a monetary strategy for this year and beyond that will be difficult to undo under a new chairman.Under Bernanke's leadership, the Fed has set out clear markers for the conditions that need to be met to moderate and eventually end its asset-purchase program and then begin increasing interest rates. As a consequence, the identity of the chairman next year is unlikely to matter as much as in the past.

Bernanke's second four-year term as chairman ends on 31 January. While neither he nor the White House has said definitively that he'll step down, President Barack Obama suggested just that in a television interview last week, saying the Fed chief had stayed in his post longer than he wanted.Bernanke has tried to make the policy-making Federal Open Market Committee (FOMC) more transparent and democratic. By de-emphasizing the role of the chairman in the committee's deliberations, he has made it harder for his successor to change the course of policy, said Roberto Perli, a former Fed official who is now a partner at Cornerstone Macro LP in Washington.

The rupee's fall in the afternoon session was swift despite a feeble attempt by the RBI to defend the currency as end-of-month dollar demand from importers triggered stop-losses at around 60 the dollar that accelerated rupee falls.

The faltering currency hit bonds and stocks as foreign investors, worried about an early end to U.S. stimulus and looking to see their returns eroded, have sold a combined net of more than $6 billion in both markets so far this month.

The problems are being compounded by perceptions India is ill suited to defend the currency in the near-term. The Reserve Bank of India has around $291 billion in currency reserves, enough for only seven months of import cover.

The government has promised measures to attract foreign investment, but remains hampered by a perception that previously announced measures such as opening up the retail sector have faltered in their implementation.

"The advertised reason is the CAD, but this has been purely an excuse by markets," said Suresh Kumar Ramanathan, head of regional interest rate and FX strategy at CIMB Investment Bank in Kuala Lumpur.

"The real fact is that the market has attempted to take on the RBI by adding the pressure to intervene and to identify how much resolve the RBI has to defend the 60 level," he added, noting the rupee slumped once the central bank was unable to defend it.

The partially convertible rupee fell to an all-time low of 60.76, breaching the previous low of 59.9850 hit on June 20. It closed trading at 60.7150/7250 versus its Tuesday close of 59.66/67.

The rupee fell 1.8 percent for the day, the worst performance of the day among emerging Asian currencies and has slumped 11.3 percent since the start of May.

India is due to post current account deficit data for the first three months of the year on Friday, and any data that shows that gap has not narrowed from a record high of 6.7 percent of gross domestic product in the October-December quarter could spark more selling in domestic markets.

For now, a cautious RBI is likely to remain the first line of defence. The RBI was seen intervening on more than one occasion on Wednesday to stem the fall, selling dollars via state-run banks, but failed to prevent a slump.

The central bank has also been asking banks about the nature of flows and intraday open positions, which is being eyed by traders as a potential precursor for rules mandating a cut in speculative trades.

The RBI did that in December 2011 when it mandated lenders to reduce their intraday net open positions by 50-75 percent.

"The RBI now needs to come out with administrative strictures to cut speculation, curb excessive import/foreign currency loan hedges and take oil imports out of the market," said Moses Harding, head of asset liability management at IndusInd Bank in Mumbai.

The government is also due to announce measures such as opening up the telecom and defence sectors for foreign investment, adopting the same playbook in September when the country sparked a rally in markets by opening up the retail and aviation sectors to foreign investment.

By contrast, promises to adopt measures have so far failed to encourage investors.

Bond yields jumped on Wednesday, with the 10-year bond yield rising 8 basis points to 7.58 percent, its highest since May 14.

India's fixed income association relaxed trading bands for government bonds for Wednesday's session after some of the debt hit their upper yield circuits, dealers said.

Interest rate swaps also surged with the benchmark five-year OIS rate 14 bps up at 7.44 percent, while the one-year rate closed 10 bps higher at 7.53 percent.

The US housing recovery is strengthening. Factories are fielding more orders. And Americans' confidence in the economy has reached its highest point in 5 years.

That brightening picture, captured in four reports this week, suggests that the economy could accelerate in the second half of the year. It underscores the message last week from the Federal Reserve, which plans to slow its bond-buying programme this year and end it next year if the economy continues to strengthen. The Fed's bond purchases have helped keep long-term interest rates low.

Investors appeared to welcome the flurry of positive data. The Dow Jones industrial average rose 100 points to close at 14,760, and broader stock indexes also ended the day up. Those gains made up only a fraction of the markets' losses since Chairman Ben Bernanke said last week that the Fed will likely scale back its economic stimulus within months a move that would send long-term rates up.

Last month, US employers added 175,000 jobs, which almost exactly matched the average increase of the previous 12 months. Steady job growth has gradually reduced the unemployment rate to 7.6 per cent from a peak of 10 per cent in 2009. And rising home and stock prices since the recession ended four years ago have made many Americans feel wealthier.

The combination has kept consumers spending this year despite higher Social Security taxes and steep government spending cuts that took effect this year.

The survey was completed June 13, so it didn't reflect the past week's plunge in stock prices. The market turmoil might lower July's consumer confidence. Still, many economists say they doubt that any drop in confidence would be dramatic.

For most Americans, the biggest investment is their home. And a steady rise in prices is allowing them recover much of the wealth they lost during and immediately after the Great Recession.

US home prices jumped 12.1 per cent in April compared with a year ago, according to the Standard & Poor's/Case-Shiller 20-city home price index. That was the biggest year-over-year gain since March 2006.

For a fourth straight month, prices rose from a year earlier in all 20 cities in the index. Twelve cities posted double-digit price gains.

More buyers and a limited supply of available homes have lifted prices in most cities. Higher prices have, in turn, fuelled further sales and encouraged builders to ramp up construction. A more sustainable housing recovery is contributing to economic growth and creating more jobs.

Sales of new homes rose in May to a seasonally adjusted annual rate of 476,000, the Commerce Department said. That was the fastest pace since July 2008. Though sales of new homes remain below the 700,000 annual rate that most economists consider healthy, the pace has jumped 29 per cent from a year ago.

Last week, the National Association of Realtors said sales of previously occupied homes in May surpassed the 5 million mark for the first time since November 2009.

At a news conference last week, Bernanke noted that the strength in housing was a key reason the Fed had raised its outlook for growth next year and is moving toward slowing its pace of bond buying.

The Fed's bond purchases have helped fuel the housing gains by keeping mortgage rates down. As recently as early last month, the average rate for a 30-year fixed mortgage was 3.35 per cent, just above the record low of 3.31 per cent. The average remains historically low at 3.93 per cent.

Many investors worry that many consumer and business loan rates, which have already started to rise, will jump once the Fed scales back its bond purchases. More expensive loans could slow the housing recovery and sap the economy's momentum at a critical moment.

Even so, Mark Vitner, an economist at Wells Fargo, said the reports point to underlying strength that should enable the economy to withstand jittery financial markets.

"The economy is strong enough now that it can handle a couple of rough days on Wall Street," Vitner said.

The weakest part of the economy this year has been manufacturing, which has been held back by a recession in Europe and tepid growth in other overseas markets. But factory activity may start to rebound, according to a report from the Commerce Department. The department said orders for durable goods rose 3.6 per cent.

Most of the increase was due to commercial aircraft orders, which tend to fluctuate sharply from month to month. Still, businesses also ordered more computers, communications equipment, machinery and metals.

As a result, a category of orders that's viewed as a proxy for business investment plans which excludes the volatile sectors of transportation and defence rose 1.1 per cent. That matched similar gains in April and March. This category hadn't risen for three straight months since 2011.

Paul Ashworth, chief US economist at Capital Economics, said he still thinks economic growth is slowing in the April-June quarter to an annual rate below 2 per cent. That would be down from a 2.4 per cent annual rate from January through March.

But Ashworth said the pickup in orders should help drive a stronger economy in the July-September quarter. He said growth could exceed an annual rate of 2.5 per cent in the final three months of the year.

In that sense financial markets overreacted, as they are apt to do. But Bernanke also focused investors' attention on the challenges of a return to normalcy in global financial conditions — because that's what the tapering of QE and the (still distant) prospect of higher short-term interest rates represent. Monetary policy quite rightly went far out on a limb in the aftermath of the recession, and getting off that limb was never going to be easy. Anxiety over this maneuver isn't misplaced.

For the past several years, central banks, led by the Fed, have provided extraordinary liquidity to global markets, driving down interest rates and leading investors to search far and wide for decent returns. Capital has flowed into emerging markets. As normal prices and valuations are restored, these flows are bound to be partially reversed, and assets whose prices were bid up will get cheaper. The process had already begun; this week it accelerated.

Dubbed "Black Thursday" by Commerzbank analysts, commodity markets suffered their biggest drop in a year and half, hit by bleak Chinese data and the Fed`s plan to slow its bond-purchase program by the end of the year.The 19-commodity Thomson Reuters-Jefferies CRB index sunk 2.5 percent on Thursday, its sharpest decline since December 2011. Gold bore the brunt of the Fed-induced sell-off with bullion hitting a two-and-a-half year low. U.S. crude oil sank 3 percent. That helped ease the threat of triple-digits, offering a degree of relief for consumers.

Last week`s survey highlighted the risk of USD 100 US crude , but noted oil bulls needed a dovish Fed to take prices over the century mark. Furthermore, the critical level has proven a tough barrier to break and attempts to challenge the century mark had failed five times this year.

In terms of risk factors, strategists warned the jump in 10-year Treasury borrowing costs above the critical 2.50 percent mark on Friday, a near two year high, may be a negative cross-sector theme.

"This could very well turn into a summer of market discontent," said Tom Weber, senior commodity advisor at Portfolio Managers, Inc. Commodity Futures and Options in Los Angeles. "The Question is: Are the bond vigilantes ready, willing and able to put the Fed to the test by pushing down prices, thereby raising yields?"

Dhiren Sarin, chief technical strategist for Asia-Pacific at Barclays also highlighted the risk from higher rates in the US: "The risk is the ongoing bond sell -off leads to profit taking in several other assets," said Sarin, who has a bearish recommendation for oil this week. "Further, USD 100 tends to be a psychological hurdle for WTI and perhaps investors are tactically looking to go short against this level. However, we do not expect dramatic downside and would view weakness as a temporary correction."

A little over 60 percent of respondents (eight out of 13) expect prices to ease further this week, about a third, or four respondents forecast prices to climb while one says prices will consolidate around current levels, according to CNBC`s poll. Jonathan Barratt, the chief executive officer of Barratt`s Bulletin, a commodity newsletter in Sydney said he established short positions, or bearish bets, on U.S crude at USD 99.04. "We went short at what now is a great level," Barratt said. Looking into next month, Mark Waggoner of Excel Futures said US crude may drop to USD 84 as soon as Brent breaks USD 100.

US data this week - durable goods, new home sales and home price data on Tuesday are amongst some of the key scheduled releases - will be closely-watched by markets to determine how soon stimulus may start to be withdrawn.

Unless the data "relight the lantern at the end of the tunnel," oil and the broader commodity complex is heading lower, Portfolio Managers` Weber said.