US TAPERING my friends usually asks me what the heck that is tapering which was every newspapers headline, which

is a good wakeup call that not everyone knows what we're talking about when we refer to that.well it is not a new concept. So here's your ultra-simple explanation of what's going on.... In the middle of the 2008-2009 financial crisis, the Fed cut interest rates practically to 0% in a bid to stimulate the economy. But even with these ultra-low rates, there's still too much unemployment. So how does the Fed keep stimulating if it can't cut interest rates further? The Fed buys a lot of long-term US Treasuries and Mortgage-backed securities to cut borrowing costs and pump cash into the system. The Fed buys these assets with money it creates out of thin air, which it can do because it's the Fed. At the moment, it spends $85 billion on these purchases per month. Tapering is the process of reducing the pace of these purchases to, say, $75 billion per month. It's not ending the purchases, it's just slowing down the pace of new purchases. Bernanke always said that the decision to "taper" would be dependent on the economy doing strongly. The Federal Reserve on Wednesday decided to trim its bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.

Five reasons why Indian markets are brushing off QE taper

The markets seem to be undecided on a bias, thanks to the US cutting its quantitative easing programme by another $10 billion to $65 billion. It was just last month that the US Fed had announced a taper of $10 billion from the $85-billion stimulus. Indian stock market's benchmark index, that is Sensex closed the day at 20,513.85, up 15.60 points, or 0.18%. Yesterday, the Sensex lost more than 280 points in intraday trade, but pared losses in late trade, ending the day with a loss of 149 points. Here are five reasons why the Indian stock market is not reacting much to QE tapering: Rupee factor A large part of the bearishness seen on Indian stock markets last year was attributed to the rupee fall. The rupee had hit near 69 levels in late August on account of fears that the US would start to taper its $85 billion stimulus. Experts see the rupee not having any big impact this time around in the face of the QE cut announced late on Wednesday. "The rupee will weaken on both domestic and external factors; but only gradually. This is because RBI has made some moves and that should actually sort of provide a cushion for the INR. I see the currency stabilising at about 64 for now," Nizam Idris, Managing Director and Head of Strategy, Fixed Income and Currencies, Macquarie, tells ET Now. "I do not see continuing of the tapering of US bond-buying programme will have any major impact on the Indian currency," says Mohan Shenoi of Kotak Mahindra Bank. "Having said that I do not think this time around it will have any impact on Indian currency in particular. Of course there's some turmoil in emerging market currencies, particularly Argentina and Turkey. But then this is unlikely to impact the Indian rupee in a significant way," he said."In feel the only risk we may be facing is that we have huge inflows from FIIs on the debt segment in January. We got about $3 billion; all of which has gone into treasury bills. Now this is very short-term money which has come in search of returns. So, if this money attempts to go out there could be some pressure," he concludes. Today, the rupee is trading at 62.47 against the US dollar as of 11:11 am. Strong economic base India's current account deficit (CAD) for the current fiscal year is expected to be less than $50 billion, which is less than 2.5% of the GDP. The country's forex reserves stand at about $295 billion. Experts say Fed tapering is expected to impact countries which are running high fiscal deficits. Emerging markets have very clear, specific problems in places like Argentina, Venezuela and Turkey, says Jim Walker, Founder & MD, Asianomics.

"The problems in South East Asia are limited to Indonesia. Elsewhere we see sound financials ... So, there are countries that could fall in Asia. I do not think India is one of them. China may be the surprise packet here, but elsewhere among the emerging markets the fundamentals, particularly in Asia, are pretty strong," he said. Yesterday, economic affairs secretary Arvind Mayaram said: "Worry is for countries like Argentina. They have a problem as their forex reserves are low; at around $29 billion. Also, their current account deficit is extremely high." "QE cut should not be a worry for the Indian economy as well as the stock markets as our fundamentals are strong," he said. Bullish outlook The US is cutting QE as the latest figures project a pretty strong rebound for the US economy, at least on the face of it. Given this, experts say the strength in US economy augurs well for emerging market economies like India. India is the best place to attract demand as developed economies shows strength and demand improves, they say. Mark Matthews, Head of Research Asia, Bank Julius Baer said: "Right now, there is wonderful performance of the South East Asian markets, like Thailand, the Philippines and Indonesia since 2009, whereas China was basically in the doldrums. As and when the dust settles, I think India is set up well for a decent year." RBI impact The Reserve Bank of India, like central banks of several emerging economies, is going for extraordinary repo rate hikes. The RBI, after three consecutive rate hikes, before the December 18 policy meet, raised the repo rate by another 25 basis points in its latest policy meet on January 28. The rate hike is seen by experts as stemming a possible slide in the currency on account of QE cut. "... the day when the Reserve Bank announced a rate hike, the rupee actually appreciated ... we believe that the current trends in the rupee which is now closer to the 63 levels, maybe it may go a little bit further and then it will rebound," says Dr SK Ghosh, Chief Economic Adviser, Economic Research Department, SBI. Political factor Elections are seen as the next big trigger for the Indian market. Most market analysts are betting on a BJP-led government at the Centre to revive market sentiment. Experts are of the view that if a party gets absolute majority, the markets could shoot up about 15% in just a day. This probably is another factor why the markets are ignoring the QE cut, which analysts feel has already been factored in by investors. "I am a bit surprised by Thursday's sharp reaction. $10 billion taper by the Fed this time was reasonably well factored in," said Sudip Bandyopadhyay, President, Destimoney Securities This unemployment target was revised in June this year to 7%, sending the markets into a spin

When the Fed stops injecting money into the US economy, money supply will again tighten in the US and the value of the US dollar will likely appreciate, making it more attractive to investors and sending the ruppee down the sea. This will be good news for exporters but will mean higher prices for imported goods, including petrol.

Inflation
Investment adviser Don Stammer says that in the context of all the liquidity being pumped into the world economy, the risk of inflation eroding returns should also be a consideration for investors.

implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets.
Here are 10 things to know about the QE taper: The Fed has decided to reduce the quantum of bond buying per month from the next year. So, it would reduce its monthly asset purchases by $10 billion to total $75 billion. Chairman Ben Bernanke said the Fed will take "similar moderate steps" throughout next year to reduce the purchases further if the economy shows continued improvement. Though the Fed will cut back on bond purchases, it plans to hold its key shortterm rate near zero at least until unemployment falls below 6.5 per cent. Fed's outlook on rates was interpreted as more dovish than expected leading to a rally in stock markets. (Read more) The immediate trigger for the Fed's decision to taper its massive bond buying was a recovery in the US job market, Bernanke said. The Fed predicts the unemployment rate in the US will dip as low as 6.3 per cent next year and 5.8 per cent in 2015. It's now at a five-year low of 7 per cent. The bond buying, also known as the quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in the US economy, which was recovering slowly from the Great Recession. The Fed's first QE program was launched in the midst of the 2008 financial crisis. The QE helped keep long-term interest rates low to encourage more borrowing and spending in the US. Wednesday's decision signals better prospects for the US economy and labour market. The Fed estimates that economic growth will be between 2.8 per cent and 3.2 per cent next year as against 2 per cent in 2013. Bernanke blamed the slow recovery in the US economy to extensive damage from the housing bust and tight budgets at all levels of government. He also blamed the anemic pace of the recovery on "some bad luck", saying Europe's debt troubles slowed the global economy at a critical time. (What Bernanke said)

The asset purchases by the Fed have stoked anxiety that they could unleash inflation or fuel hard-to-detect asset price bubbles. Even some within the Fed have worried the bond purchases could have unintended and economic costly effects. The unprecedented money-printing has helped drive stock markets in the US and many other countries to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing. The Fed policy meeting was the penultimate one of Bernanke's tenure. His second four-year term as chairman of the central bank expires on January 31, just two days after the close of the Fed's first policy meeting of 2014. Janet Yellen, the Fed's vice chair and a strong proponent of the Fed's aggressive response to the recession, is positioned to succeed Bernanke. The US Senate is expected to vote to confirm her for the post by the end of this week. Chairman Bernanke said Yellen "fully supports" the Fed's decision to slow its bond purchases.