Bernanke lets the bull out
Bulls across the world and across asset classes cheered Federal Reserve chairman Ben S. Bernanke's surprising 50 basis point cut in its benchmark interest rate, pushing stocks, bonds, oil and metals sharply higher. But, the dollar tumbled to a new low against the euro, falling below the $1.40 mark. Global investors had been literally bagging for aggressive rate cuts from the US central bank to prevent a recession in America and revive confidence in financial markets. Markets have been in a state of flux over the past couple of months owing to the sharp slowdown in the US housing sector, especially the subprime mortgages. The weakness in US housing sector and the consequent crisis of confidence in the credit markets had raised concerns about the health of the global economy, prompting central banks across the world to swing into action. Even the usually hawkish central banks in Europe and Japan had to climb down from their stated positions and help stem the slide. Still, that was not enough and the world was looking towards the Fed to rescue the sinking ship. And, though Bernanke himself was against helping those investors who made wrong calls, in the larger interest of the US and the world economy, it didn't have much of a choice, but to slash rates.
The better than expected Fed move (in addition to cutting the federal funds rate, they also cut the discount rate by 50 bps to 5.25%) and the pledge to do more if need arises sent investors into a buying frenzy. The Dow Jones Industrial Average ended the day up 336 points, a 2.5% gain, and the biggest one-day jump since April 2003. The broader S&P index rose 2.9%. Equity markets rallied across the globe, with the Hang Seng breaching past the 25,000 mark, and India's Sensex and the Nifty climbing to a new lifetime highs. The Sensex crossed the 16,500 mark and had its biggest weekly gain in absolute terms. The Morgan Stanley Capital International Asia-Pacific Index jumped 3.9%. The Nikkei surged the most since March 2002, climbing 3.7%. European stocks climbed the most in more than a year. The risk of owning European corporate bonds dropped to the lowest in two months.
Not everyone was happy, though. Some experts expressed concerns that the Fed had bailed out Wall Street and compromised its inflation-fighting credentials. The central bankers left themselves plenty of room for manoeuvre. The statement accompanying the Fed's decision made clear that the rate cut was intended to help forestall the adverse effects on the economy from financial-market disruptions. But it made no commitment that more cuts would be coming. Even though the US economy has not worsened dramatically on the back of the slump in housing prices, the risks of a truly nasty surprise have escalated. A bold cut now was aimed at reducing those risks. By acting boldly now, Bernanke must hope to avoid hasty inter-meeting cuts.
Rupee hits 9-yr high; tops 40 level
The bolder than expected Fed rate cuts lifted the Indian Rupee to a nine-year peak against the US Dollar. The Indian currency rose above the psychological 40 rupees per dollar mark amid continuing optimism that the Fed rate cuts will spur foreign capital inflows into high-yielding markets like India. The rupee gained 1.4% this week to close at 39.8875 per dollar. This was the rupee's fifth straight weekly advance and was its biggest weekly gain since April. The currency strengthened beyond 40 per dollar for the first time since May 1998 and climbed as high as 39.84 in intraday trading on Friday.
The rupee is Asia's best-performing currency this year, rising well over 10%, on the back of aggressive buying of local shares by overseas investors. The benchmark BSE Sensex rose to a record 16,564.23 today, gaining for a fifth week and is up over 5% since the Fed rate cuts. Overseas funds pumped in US$607mn in Indian shares on Sept. 19, the most since July 6, according to capital market regulator SEBI. The rupee may gain further in the medium term from these flows as well as dollar sales by exporters, according to currency strategists.
A stronger rupee means bad news for exporters. Shares of IT companies tumbled amid fears of margin contraction and lower profits. Individuals can benefit as they can spend more while traveling abroad. Also, with the economy still growing rapidly, a strong currency can counter the impact from record crude oil prices and import of other key inputs. Foreign investors will get more from their local investments. The toughest job will be that of the RBI, who will have to manage a deluge of overseas capital inflows into the stock and other assets.
Commerce Minister Kamal Nath said the appreciation in the partially-convertible currency was a matter of concern and that the Government would look at steps to protect exporters. "It is a new situation and it needs a new response," Nath told reporters in New Delhi. The Government ruled out scaling down the export target of US$160bn for 2007-08. "Rupee appreciation is a concern. We a re going to look at steps to help exporters," Kamal Nath said. The Government has a target to increase merchandise exports by 20% in the current financial year ending March 31. Exports have risen by 18.2% in the first four months of the fiscal.