Saturday, May 25, 2013

Don't dance to China, Japan tunes: FM tells investors
Ask them not to misinterpret Bernanke's statement and India's economic fundamentals
As stock markets tumbled on worries that the US Federal Reserve might cut monetary stimulus, Finance Minister P Chidambaram tried to soothe investors’ nerves and asked them to read the US central bank governor’s statement and India’s macroeconomic parameters correctly.

He asked them not to link specific economic parameters in Japan and China to the Indian economy, as low purchasing managers index number for Chinese manufacturing also contributed to nervous selling in stock markets.

“I think someone either misunderstood or misinterpreted the (Fed chief ) statement. If we read the statement carefully, he has clearly indicated  he will continue with quantitative easing in the foreseeable future at about $85 billion (Rs 4.7 lakh crore) a month or so,” Chidambaram told reporters after  nervous selling in Indian stock markets.

The minister said quantitative easing was continuing without any change in Japan and the flows into India during May had been  copious.

Foreign institutional investors net-invested $5.3 billion in stock markets till yesterday  this year, against $11.8 billion in the corresponding period last year.

“I am looking forward to June and the second quarter with much greater confidence,” Chidambaram said.

Later, chief economic adviser Raghuram Rajan told reporters: “I think the Federal Reserve said yesterday that there is no intent to end it (quantitative easing) early. My reading of (Bernanke’s) statement is that they are going to continue. In that sense, we will have to deal with consequences of quantitative easing when it comes.”

Bernanke had said yesterday the Fed’s monetary stimulus was helping the US economy recover for months, but the central bank needed to see further signs of traction before taking its foot off the gas pedal.

A decision to scale back the $85-billion worth of  bonds the Fed is buying each month could come at one of the central bank’s “next few meetings” if the economy looked set to maintain momentum, Bernanke told the US Congress.

Chidambaram asked investors to read the situation correctly and not be unduly influenced by external developments. "There was no need for any nervousness."

He said the economic situation in India has been improving with decline in wholesale and retail inflation.

"...Agriculture and labour-based inflation have come down, core inflation has come down, WPI headline inflation is below 5%, CPI based inflation is coming down, inflows are copious and someone from the media told me that he is seeing more advertisement revenues in the last two weeks", the Minister said.    

Admitting that certain numbers coming out of China were disappointing and also the quantitative easing programme in Japan could run into problems, Chidambaram said, "these are factors that are peculiar to the China market and the Japan market (and) they have no relevance at all to the situation in India."

HSBC purchasing managers' index (PMI) fell seven month-low of 49.6 points in May against 50.4 in the previous month. A reading below 50 points means contraction. So, basically Chinese manufacturing output contracted in May. These were advance estimates as the month of May is yet to be over.

The disappointing number of Chinese PMI also spooked markets in Japan as its benchmark Nikkei plunged 7.3% today.
The benchmark equity index Sensex declined 387.91 points, while Nifty fell 127.45 points.

The rupee also declined to 55.59 against the dollar on sustained dollar demand and strengthening of the US currency overseas. Rajan said,"we are not the worst but we are also not the best either in terms of depreciation. We are watching the rupee, but I won't say it is out of sync with what is happening in other countries."    

Look at all other currencies, the Euro has also depreciated against the dollar. Actually Japanese yen has done more than the rupee, he added.    

Rajan said the Reserve Bank of India (RBI) takes decision on market intervention with regard to rupee movement.      "I think in terms of decision how much to buy, those decisions RBI takes...I think a stable ruppee is something that is justified," he said.