This was supposed to be doomsday for the Indian (and other emerging markets) economies. Last night, the US Federal Reserve announced that it was ending the so-called Quantitative Easing (QE) program. QE is essentially a funding system under which the Fed bought trillions of dollars of US Government Bonds since the 2008 crisis, which is another way of saying that it poured a giant amount of money into the world economy. The goal was to aid economic recovery by providing cheap and plentiful money.
Certainly, asset prices (stocks, real estate, and much else) around the world have likely been sustained by QE. Now, with the withdrawal on, will these prices collapse? Will there be other kinds of economic trouble for economies like ours which are now dependant on cheap money from abroad? Raghuram Rajan certainly thinks that a withdrawal of QE will be bad for India, although not as bad as it would have been a year or two ago.
In fact, our readers would remember the huge crisis in mid-2013 when the rupee collapsed, money flowed out and even debt funds lost money. Of course, that was the time when we had a weak and indecisive government and a career bureaucrat as the RBI governor.
Even so, the end of QE is increases the uncertainty. It will increase the cost of money and reduce its availability around the world. How this will affect India is an unknown at this time.
Despite this, there is little point in investors reacting in a knee jerk fashion. Value Research readers who take a long-term view and choose fundamentally sound stocks should hardly bother about the end of QE till such a time that the micro, sector or company level impact becomes clear. As of now, this is just another headline news. Not just that, the Fed has announced and then postponed or softened this QE termination a number of times in the past. That doesn’t give us any ground for taking any hasty actions.
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