Quantitative Easing by USA

The US Federal Bank announced to unlimited Quantitative Easing at the rate of $40 billion a month, surprising the market which at the most was expecting a one time QE3. This sent the prices of all risk on assets, rocketing higher. While even the Indian stocks joined the rally, the long term effects of this round of money printing by “Helicopter Ben” is going to be pernicious for the Indian economy. India is already reeling from high inflation of food and energy which has considerably slowed down the GDP growth. Along with the ECB announcement of purchase of sovereign bonds, liquidity at zero interest rates is going to slosh around the global capital markets further increasing the asset bubbles in real estate and commodity markets. Oil prices are already hitting the triple digit, market will increase further worsening India’s position due to increase in the quantum of oil imports.

The earlier US QE had caused a sharp spike in foods prices.

USA Easy Money Policy is a Killer

The US Federal Reserve is hell bent on preventing deflation through whatever means possible. It has raised the prospect of 2008 when Commodities all over the world raced to new highs due to cuts in Interest Rates. 2010 has already seen its first food riots in Africa. Every Commodity be it Gold, Silver, Coffee, Sugar, Rice, Wheat is jumping higher as the common denominator Dollar gets Debased by US Policies. While the stupidity of the Monetary Easing is a big exhaustive issue in itself, the prospect of higher commodity prices is a huge danger. It is already fueling dangerous equity bubbles in the emerging markets of Asia. Currency Wars are already starting to happen on a small scale as Crazy Monetary Policies take hold in the US. Food Prices are a very major problem in poor countries unlike developed countries where food forms only a small part of the daily expenditure. With Food forming 50-80% of the expenditure of poor citizens, a 50% increase in Prices immediately leads to hunger and starvation. However do not think the US Fed concerns itself with such trivial issues.

In summary 5 factors which will badly affect the Indian stocks are:

a)      Higher Oil imports

b)      Exacerbating the ongoing the real estate bubble

c)       Increasing the price and imports of gold worsening the fiscal deficit

d)      Food and Energy Inflation leading to greater social pressures

e)      Rise in the already high income inequality.

More Opinions on QE effect on India

Jim Walker has a good take on QE:

Have been long on the Indian stock market for the last few months using a US dollar priced ETF, that is listed in Hong Kong. However, my main reason for buying that was because the Indian rupee at 55.5 is way oversold. The stock market has somewhat surprisingly gone up. Today, I put the order to sell my ETF because I do not think it can get any better than this. As regards the euphoria over stock markets, it is time to cash out.

The fact remains that oil prices are now higher than they were, 27% higher than they were in the middle of June, this is bad news for India. The government at last has increased the diesel price by Rs 5, they need to do it by Rs 50 to get things balanced and also increase electricity and increase fertiliser prices.

Another view similar to my own:

In the near term, the pattern of QE has always been strong for emerging market currencies and even stronger for commodities. The quantitative easing programme will be an ongoing thing — it is QE(x), rather than QE3 — with about $40 billion a month. Therefore, the Fed decision will be positive in the near term, but I would proceed with caution. It is really good for India, but India is not an obvious QE play. If you look at QE1 and QE2, the affects have been pretty ambiguous; QE2 especially was not particularly good for the Indian markets. So, I do not think QE3 should be deemed a major factor driving portfolio decisions for India in the medium to long term. It will give a short-term fillip to the market.