For beginners … Quantitative Easing (QE) was an innovative first time method launched by the US FED to improve liquidity in the economy that was stuck because of the financial crisis. Launched in Nov 2008, QE 1 was launched to buy $600 billion in Mortgage Backed Securities. In March 2009 Bernanke launched QE 2 announcing it would buy $750 billion MBS.
In September 2012 more QEs were launched which ended up buying $85b worth of long term treasuries to boost the liquidity and the growth in economy. With employment rising & economy looking like its back on track Bernanke now wants to slowly roll back the easing. This spooked equity, commodity and currency markets all across the world.
The roll back was always coming but the timing was a bit early in lot of experts opinion. Though Bernanke has defined few conditions to start the roll back, I feel the QE era is over. Now what are the effects of it.
The easy money that was flowing to India and other emerging markets will come down. This very fact spooked our markets which came crashing down since the time the news of roll back has come out. Yes, India might not get the money now and thats the bad news. Dollar strengthening is another bad news.
Good news, the commodity asset prices that were inflated because of easing will come down and thats a big positive for our imports. Lesser dollar printing will hopefully make gold as hedge less attractive. Which is a long term positive. Quality of whatever flow that might happen into markets will be better. US economy back on track is a huge positive for our exporters. Exporting more will help control CAD.
India still ranks among the top in terms of absolute growth numbers but we are still way far behind our potential. The Government measures will take atleast 18-24 months to show results and hopefully by 2014 we will see the GDP numbers getting revised upwards. There is no quick fix for the issues faced by us in infrastructure but hopefully many old projects will get revived helping us return back to pre-2008 growth. FDI according to me will wait for the new Government of 2014 before taking any big entry. So we are largely dependent on FIIs. Overall QE rollback is a huge positive for us & hope we see some quality FIIs coming in.