The dollar deluge - Part II

Wed, 3 Nov Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Those expecting the Indian markets to take a breather will be required to have a rethink perhaps. This is because a flood of dollars could well be making its way towards the Indian markets in the near future.

The US Fed officials are expected to meet later today and take a decision with respect to the next round of monetary easing. However, if economists surveyed by Bloomberg are to be believed, another round of quantitative easing is a foregone conclusion.

Almost all the economists were of the view that quantitative easing will indeed be undertaken. The only time they differed was when trying to arrive at the quantum of the same. Still, nearly half of them were of the opinion that the size of monetary easing could well touch US$ 500 bn. A huge number by any stretch of imagination indeed.

It should be noted that an easing of the magnitude of US$ 1.7 trillion has already been undertaken by the US Fed. However, it has failed to have the impact so desired. It has led to improvement in the quality of the balance sheet of US financial sector no doubt, but has not kick started lending activity yet, a phenomenon that is so crucial to the recovery of the US economy.

Furthermore, as per a lot of experts, the US economy risks going into a deflationary trap. And Fed Chief Ben Bernanke wants to avoid such a scenario at all costs. Little wonder, he's let wide open, the flood gates of liquidity.

However, not all are convinced that such a step would indeed work. Foremost amongst the detractors is none other than Paul Volcker, one of the most respected of all the former Fed Chairman. “When money is too easy for too long, we will have more asset bubbles”, Volcker is believed to have said.

We couldn't have agreed more. Already, there are fears that rather than staying in the US, the excess liquidity has found its way into emerging markets and has led to rapid appreciation in asset prices in these economies.

And India has certainly been one of the most preferred destinations for this surplus liquidity. The RBI's decision to hike interest rates for the sixth time in the year yesterday was borne out of the need to curb the same.

However, it looks unlikely that inflows into India would slow down anytime soon. Thus, while asset prices including those of stocks could well rise in the near term, investors could do well to not fall into such a trap. It is during times such as these that it is very important a make a clear distinction between price and value and buy only when the latter is at a sizeable discount to the former.