FED DECISION TODAY WILL HAVE A DEEP IMPACT TOMMOROW AND IN DAYS TO COME

Upbeat bulls are celebrating the US Fed's decision not to cut back on its monthly bond purchases , thus keeping the pipeline of easy liquidity flowing smoothly. The Sensex closed at a 34-month high on Thursday after rallying nearly 700 points. Even the most skeptical of market experts agree that momentum could push up the market another 5-7 percent from these levels even though fundamentals do not warrant it.

There is no point talking about fundamentals when a strong gush of liquidity sweeps the market. Yet, the Fed move may have also unwittingly set the stage for a deeper correction, sometime in the next couple of months. That is because the inevitably of a reduction in bond purchases is evident. And so are the signs that the economy with its deep-rooted problems is not going to recover in a hurry. At Friday's closing, the Sensex is now quoting above its level in August when the Fed first revealed its plan to cut back on the bond purchases. And this, when there has been no improvement worth mentioning, either at the macro or at the micro level. In short, the market may not be pricing in a liquidity shock (by way of lower bond purchases by Fed) at some point in the near future. India's vulnerability to a sudden flight of foreign capital was exposed in July and August, when massive outflows from the debt and equity markets added to the pressure on the currency. Some analysts now point that the steeper than justified decline in the rupee was caused by panicky corporates trying to hedge their forex exposure through dollar purchases in the forward market. But a glance at the 3-6 month targets for the rupee, as estimated by brokerages broadly suggest that the current pull back above 62 may not be sustained.

There is chatter about macro indicators pointing to a gradual recovery. But in most cases, the numbers look better when compared with their nadir in the recent past. Take the rupee for instance, it is now above 62 after having come close to hitting 69 to the dollar. But it is still a good 600 basis points below what it was less than four months back. And that is bad enough for corporates with forex loans at a time when earnings are already under pressure. Narrowing trade deficit in July and August provided little relief because financing them was turning out to be a problem owing to the sudden flight of foreign capital.

Gold imports have been suppressed, but anecdotal evidence suggests that demand has not really reduced; it has only shifted to 'unofficial channels', causing revenue loss to the government.

 Investors appear to have regained their appetite for banking shares, all the more after the latest Fed decision, which investors feel will lead to RBI reversing some of its liquidity tightening measures in July to protect the rupee. But costlier funds could be just one part of the problem. The bigger problem is the steadily growing pile of non-performing assets. Even for some of the haloed private sector banks. It is not for nothing that the RBI suddenly decided to clamp down on the 80:20 scheme (pay 20 percent now and 80 percent on possession) being promoted by builders. Whispers are that one reputed private bank is already facing problems in a project in central Mumbai. In this particular scheme, HNIs had booked apartments under the 80:20 scheme , hoping to sell out at a profit by the time the project was completed. The project is almost complete, and the HNIs are unable to sell the flats as they had hoped to. And they have no intention of taking possession and paying the EMIs. The banks, builder and the HNIs are now trying to work out a solution. And yes, the cost of funds too is an issue. SBI 's decision to hike its base, lending and deposit rates barely two days before the credit policy is baffling to say the least. What it suggests is that irrespective of what the Fed did (or did not do) on Wednesday or the RBI will do (or not do) on Friday, money is likely to remain expensive for a while. Or maybe SBI is trying to pre-empt efforts by the government to arm-twist it into lowering interest rates if the RBI chooses to take a dovish stance.