17
Jul
11

QE3: Not good for India..

On 13th July’11, the US Fed chairman Ben Bernanke, gave hints that the central bank might consider QE3 given the weak economic data in US of the past few weeks. US stocks rallied, treasury bond prices and dollar tumbled. Precious metals like Gold and other commodities rallied after fed chairman’s semiannual monetary policy report. US economy expanded just 1.9 percent in Q1 and, Q2 outlook is also not good. Job growth had come to a halt in June while Jobless rate rose to 9.2 percent. Fed QE2 program ended on June 30,2011.

Under quantitative easing program, US Fed will buy financial assets from banks and other private institutions. QE3 will keep US interest rates low for extended period of time. If QE3 does becomes a reality, it will lead to rally in commodities like Crude Oil. It won’t be a good scenario for Indian markets. Bloated oil subsidy bill will be a big headache and it will test government’s fiscal deficit targets as well. Already we are fighting with Inflation, in case of sharp commodities rally it will be a tough struggle. China’s  FY11 Q2 GDP growth rate at 9.5 percent, which was above analyst estimates will also put upward pressure on commodity prices.

In the short-term, QE3 will lead to rally in all asset classes but not sure how long it will last, especially for Indian markets. Somehow I feel, it will make markets more complex to trade. I would love to go long, but the trouble in uncle Sam’s  poor cousin Euro-zone will be at the back of my mind. Euro-zone is a ticking time bomb and you never know which country’s trouble will trigger chain reaction across the world.

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