Global bailout moves rattle equities

Sensex trips by 271 points. Mavens not ready to call a long correction yet

MUMBAI: Indian stocks fell tracking global markets as investors wondered if the move by central banks led by the US Federal Reserve to channel billions of dollars of liquidity into financial systems will be enough to bail out seized credit markets.

“Everytime the bailout seems to be getting bigger. This is a clear indication that there is a problem and it is big. Global equities are weak also because the Fed seemed divided over the rate cut. It wasn’t a unanimous decision,” said Anil Advani, head of research, SBI Cap securities.

On Wednesday, Dow Jones Industrials charged ahead by as much as 272.5 points after news of the bailout broke, but then plunged to end just 41.13 points in the green at 13,473.9.

The Sensex acted almost similarly. It opened with an upward gap to hit an all-time high of 20,498.11 in early trade, but ended the day in the red at 20104, a loss of 271 points.

But Ramesh Damani, member of BSE and one of India’s most erudite marketmen, preferred to call Thursday’s fall just a “general correction.”

He does not think there would be an immediate local impact of Wednesday’s liquidity injection moves.

But the last time such a funds infusion took place, the money percolated to India, seeking a quick ride on the interest-rate differential, the appreciating rupee and, of course, the economy.

This created such a liquidity problem, finance minister P Chidambaram told investors in New York some weeks back.

Foreign institutional inflows haven’t been great so far in December, with just about Rs 3,000 crore trickling in.

“That’s also because most of the FIIs go on their annual holidays,” said SBI Cap’s Advani.

So the gusher restarts in January?

Damani feels eventually they will flow towards the emerging markets due to the attractive growth story.

“This could again create some trouble for the Reserve Bank of India. I feel the rates have peaked here. You can’t have lower rates there and higher rates here. RBI would eventually need to cut rates,” Damani said.

Not just the RBI, most central banks are seen continuing to fight  exchange rate, inflation and interest rates.

Lehman Brothers economist Rob Subbaraman said 2008 stands to be a particularly challenging year for Asia’s central banks, with many likely to fall behind the curve.

“Should the US Fed’s aggressive rate cuts avert a hard landing for the global economy, Asia ex-Japan, because of its high growth, relatively high interest rates and sound economic fundamentals, stands to attract massive capital inflows,” Subbaraman said in a note on Wednesday.

The impossible trinity holds that, of a fixed exchange rate, control over interest rates, and an open capital account, a country can have only two.

Asian central banks that manage their exchange rate risk losing some control in setting domestic interest rates as their capital accounts become de facto open.

“We doubt that countries will opt to impose draconian capital controls, thus it will become harder for central banks to raise interest rates because to do so would attract even stronger capital inflows and put even greater upward pressure on their currency. This is a recipe for an overheating economy,” Subbaraman said.