Moody's targets India again, says 'most vulnerable to capital outflows'

Sep 23 2013, 20:42 IST
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Moody's said the impact of US Fed on bond yields exposed structural flaws in India. Reuters Moody's said the impact of US Fed on bond yields exposed structural flaws in India. Reuters
SummaryMoody's highlights threats for India stemming from US monetary tightening.

and 1999 US rate hike cycles.

Check Markets: BSE Sensex

Asian stocks shed around 15 per cent during the 2004 tightening campaign, and by a similar amount after the Fed's first two rounds of quantitative easing after 2008.

"Recent stress in Asian equity markets indicates that the impact of the US policy remains significant," the report said.

Domestic equities declined 27 per cent in 1994 and 24 per cent in 1999 during the rate hike cycle of the US.

After the end of first round of qualitative easing by the US, domestic equities declined three per cent while after the end of the second round quantitative easing, there was a significant fall of 18 per cent.

The recent talks of the US Fed tapering the third round of quantitative easing has made domestic equities dip by 6 per cent, the report said.

The report said the Asian markets vary in their degree of sensitivity. For example, a 1 per cent fall in US stocks correlated with nearly a 4 per cent decline in Chinese stocks on average, during the six tightening periods since 1994.

Sensitivity appeared high for Thailand and Indonesia, and lowest for Hong Kong, Japan, Malaysia and Singapore, it added.

"The results reflect the greater susceptibility of emerging Asian markets to investors' changing risk appetites than more mature markets with deeper capitalisation and better-functioning financial systems," the report said.

The report, however, said the financial market effects from the coming US tightening cycle might not be as severe as in prior episodes.

"American policymakers are expected to tighten more gradually than in previous cycles, which should help Asian markets and central banks easily manage the shift to higher interest rates," the Moody's report said.

Last week's US Fed's decision to delay winding back asset purchases indicates that the US central bank is cognisant of unsettling financial markets and economies, the report concluded.

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