MARKET TURMOIL: RBI, SEBI says ‘closely monitoring’ situation

NIFTY50 – Past 3 Months

The Reserve Bank of India and the Securities and Exchange Board of India are “closely monitoring recent developments in financial markets” and are ready “to take appropriate actions, if necessary,” India’s central bank said in a one-line statement on Sunday.

The move comes in the wake of what looks to be the beginning of prolonged turmoil in the Indian financial markets.

Responding to a global movement of money from non-dollar assets to dollar assets, Indian stocks, bonds and currency have seen sharp losses of value in recent days, particularly last week.

While government bond prices fell for seven straight days, the benchmark Nifty stock index has fallen for four straight days.

The rupee, meanwhile, has fallen by around 14% from around Rs 63 to the dollar to about Rs 73 to the dollar.

FEDERAL PAINS

The turmoil is the result of a reversal of financial policy by the US central bank, the Federal Reserve.

Assets in India, including bonds, stocks and real estate, had seen a rapid appreciation in their value over the last ten years due to the policy of the US Federal Reserve to inject massive amounts of money into the market.

By late 2014, the Fed had injected around $4.5 trillion (Rs 325 lakh cr in today’s money) into the global economy in an attempt to ward off a recession in the US. It also cut US policy interest rate to just 0.25%.

While the effort did prevent a massive recession from taking place in the US, it had the unintended consequence of raising asset prices across the world.

The Fed again began raising interest rates in December 2015, and is currently at 1.75-2.0%.

It is widely expected to raise it to 2.0%-2.25% later this month, even though the US economy has seen inflation rise up to 2% — the Fed’s ‘target’ rate for inflation.

In parallel, the US central bank has also been selling the bonds that it holds — essentially sucking out money from circulation — starting exactly a year ago.

A year ago,  for example, the Fed had a total of $4.22 trillion of US securities, including about 2.32 trillion in US govt bonds. As of last week, the figure had fallen to $3.989 trillion, a decline of $232 billion.

The rising interest rates and the continued sucking out of money from the market has led to the reversal of an eight-year trend of money coming from the US to other markets.

Many foreign investors are selling bonds and stocks in countries like India and repatriating the money to the US market. This has not only crashed the bond and stock markets in these countries, but also weakened their currencies as these investors sell their assets in local currencies and then sell the currencies for dollars.

Against the 13%-14% fall seen in the Indian currency, the Turkish Lira has fallen by around 40% so far this year, while the Argentinian Peso has fallen by over 50%.

However, despite the turmoil seen in the financial markets, there is very little that authorities in India can do.

The currency is expected to stabilize naturally once the flow of foreign portfolio investor money from India ceases.

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