No major impact from new Fed tapering talks: Analysts
Mumbai: The US Federal Reserve's latest hint at early ending of the monthly bond repurchases and that interest rates could start to rise from early 2015, is unlikely to have a major impact on India, according to analysts.
The Federal Reserve last week also announced it would reduce its bond-buying programme to USD 55 billion from USD 65 billion every month.
"India, in our view, is in a much better position to deal with this scenario now," Deutsche Bank said in a report.
"Policy actions have reduced the economy's external account deficits and reliance of short-term external flows, fiscal consolidation has continued, and inflation respite is palpable," the report said.
Domestic rating agency Care Ratings also said it does not see any major impact.
"The domestic economy is influenced majorly by local factors as opposed to external. Hence, it is expected to remain largely unaffected by the ongoing tapering programme of the Fed," Care said.
Both the forex and the stock markets did not show any knee-jerk reaction following the Fed announcement. In fact, two out of the three trading sessions since the announcement, the markets and the rupee gained.
The report further said the financial markets have rallied considerably in anticipation of an economic reform friendly election outcome, foreign investor interest has surged, the rupee has been remarkably strong (rose close to 12 percent from the August depth of 68.85), and latest data suggest an economic recovery is in the making.
Deutsche Bank, however, said it is not going to get carried away by the current wave of optimism.
"Our optimism rests instead on the fact that tough measures, such as fuel price hikes, monetary and fiscal tightening and FDI liberalisation have been taken over the past 18 months that will hold India on strong footing regardless of the election outcome," the report said.
The report said that in the past one or two decades, the election cycles have come and gone, and markets have rallied exuberantly in the lead-up or aftermath of decisive electoral results.
"These rallies have almost inevitably fizzled though as the reality of running a large, complex, and noisy democracy set in," it said.
Deutsche said it is encouraged by prospects of the domestic economy and just doesn't have a strong view on which party can deliver more than the other.
The report further said it expects the current account deficit in FY15 to be higher than this year (USD 50.5 billion vs USD 36.6 billion), on the back of stronger imports growth (10 percent y-o-y in FY15 as against 5.3 pr cent likely in FY14).
"As restrictions on gold imports ease and economic momentum picks up, imports growth will turn positive and raise the trade and current account deficit," the report said.
The report, however, does not expect gold imports to increase as sharply as in FY12 and FY13, to lead to renewed concerns on the CAD front.
On the rupee, the report said it does not see the currency breaching 61 on a sustained basis, as it expects the RBI to intervene and buy dollars below those levels.