Stock markets around the world tumbled to new lows on Thursday and India was no exception. Even gold plunged to a 13-month low of $1,295 an ounce. The markets had been awash with liquidity, with bubbles being created in the commodities, real estate and stock markets thanks to the very generous over $2 trillion in the form of stimulus packages pumped in by the US Federal Reserve to help the US banks tide over the financial mess after 2008. Much of this money found its way through foreign institutional investors into the emerging markets, including India. Now the party is about to be over, as US Fed chief Ben Bernanke signalled on Wednesday. With the US economy turning around, he saw no need to continue with the stimulus for much longer. The tapering would begin by the end of the year and would be completed by mid-2014.
The FIIs had already started withdrawing from the debt market in India, which led to the rupee weakening to `58 to the dollar in a few weeks. The Indian debt market still gives higher returns at seven per cent compared to the two per cent returns in the US.
All is not bleak though the threat to the rupee is real and further widening of the trade deficit can be a serious matter. But the flip side is that commodities, including oil, should become cheaper, and if the US economy recovers it means exports would pick up. However, it needs a government that performs to take advantage of adversities.