There is an irrational upsurge of expectations from Mr Rajan with almost everyone expecting him to be a one-stop-shop for solving the ills strangulating the economy
Global equity, commodities and currency markets were thrown off guard by the colossal surprise sprung by US Fed chairman Ben Bernanke, who decided to continue the quantitative easing (economic stimulus) programme. This means the Fed will continue to pump in $85 billion every month even while global markets were thinking that it would taper its programme by $10 billion to $15 billion per month.
Mr Bernanke’s threat in May this year to start tapering the QE by the end of the year had sent global equity and currency markets into a tailspin. They continued to be buffeted by uncertainty till Wednesday.
Mr Bernanke’s about-turn on Wednesday was based on his version of a quadrilemma. The job market was still shaky with the unemployment rate at between 7.3 and 7.5 per cent. He would like it to come down to 6.5 per cent and the implication is that the QE could continue till then. The other reasons cited were mortgage rates going up, growth rates remaining low and the coming fiscal problem of the US over the budget, or what is seen as the threat of a US government shutdown if a deeply fractious US Congress fails to reach an agreement on government spending and the US debt limit.
Analysts feel the US unemployment rate may not reach 6.5 per cent till the end of 2014 or later and it seems unthinkable that the Fed would keep pumping in $85 billion every month till then.
However, the global markets showed what one analyst called “mid-autumn merriment” with the major Asian markets up between 1.5 to 1.7 per cent and India’s Sensex and Nifty hitting gains not seen since May 2009. Even the rupee, which fell 20 per cent and was hit hardest of all currencies since Mr Bernanke’s capricious threat in May, saw a robust recovery at 61.77 to the dollar as the dollar sank to a seven-month low against the euro.
The million-dollar question for the Indian markets, and everyone else, is what the RBI’s new governor, Raghuram Rajan, will do on Friday when he announces his first credit policy. There is a view that he could release some of the liquidity tightening measures announced in August without touching key policy rates. India faces problems of high inflation, particularly food inflation, low industrial production, low growth and huge fiscal and current account deficits. There is an irrational upsurge of expectations from Mr Rajan with almost everyone expecting him to be a one-stop-shop for solving the ills strangulating the economy after the Manmohan Singh government’s two years of policy paralysis.
It would be exciting to see what Mr Rajan does within the serious limitations of the dire macro economic situation to spur growth and employment.
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