Stock markets goes into a swing as and when there is a news on 'tapering' by US. If there is a news on push back, the markets react positively but the moment there is an news on 'tapering' being implemented, the market goes onto a tailspin. Lets first understand what actually is 'tapering' that is generating so much instability in markets world over.
From 2008 to 2010, Fed pumped in more than $2 trillions in the financial markets and kept in pumping more money as we can see. However, it did not translated into growth in US markets as was expected. The growth normally is realized if the money available with banks through this program is lend to local borrowers. Then where did this money go? On one hand, when the growth was stagnated in US and European markets, Asian economies like China, Singapore, India were not effected by this global downturn. Even though business were experiencing slow growth, property market and stock market was booming. To think of it, ideally 'tapering' should not have any effect on global market as Fed stimulus was aimed at reviving US economy and as it seems reviving, Fed is withdrawing the stimulus. It should be a local phenomenon .
So it can be safely assumed that Fed stimulus has actually made way to these emerging economies. Financial and private Institutions of US have been investing the Asian countries particularly India and China. Between 2009-2012, property prices in India have more than doubled, inflation has assumed alarming proportions with no sight of it slowing down, and most of the stocks returning more than 20% despite no growth signs. Though exchange rate fell from over 50 in 2009 to 45 in 2010, it was almost stagnant at 45 rupees a dollar till mid 2012. My guess is that to keep the exchange rate competitive, Central Bank pumped more rupees into the Indian economy. Ideally this should have translated into investments for future growth of the economy, but that was not the case.
|Is QE responsible for this?|
But I also have a view is that though tapering is going to impact us in short term, it will be beneficial in long term as the recent inflation was not growth-led. This might actually turn out to be blessing in disguise and may led to revival of Indian economy. It might also bring back local investors to stock market who have been shying away because of prevailing uncertainty. Property market might bring in actual buyers rather that speculative investors. It is a hope for now that can turn into an opportunity by effective fiscal and monetary policy and efforts from the government. Hoping for it to happen!