How will Asia react to Bernanke cutting QE? Nomura's take

Moneycontrol Bureau

Global financial markets are on the edge, awaiting a cue from the US Federal Reserve on the direction of quantitative easing. Hints at a gradual scaling down of the Fed's bond purchases triggered a global sell-off last month, and investors are yet to regain confidence even though world markets have stabilized since.

Also Read: Mr Bernanke! Stock markets are all ears

Nomura strategist Rob Subbaraman believes Asia's fundamentals are much better than what they were just before the Asian currency crisis in the late 90s. He says the recent meltdown in Asia triggered by fears of the Fed cutting back on bond purchases is merely a short term correction, and not the start of a bear market.  

A snapshot of his view on how Asian countries are likely to respond in the unlikely event of another round of market sell-off should the Fed chairman Ben Bernanke tonight hint at a reduction in monetary stimulus:

* Ample FX reserves would be deployed for intensified FX intervention to limit the pace of currency depreciation.

* In terms of import cover from FX reserves, India and Indonesia have the least room for this form of intervention, while China, Taiwan and the Philippines have the most.

* There would also likely be policy action to encourage capital inflows and discourage outflows by, for example, refraining from cutting policy rates (India and Thailand), or if domestic demand is strong enough, hiking rates (Indonesia, Malaysia and Thailand).

* In China, to reduce the drain on domestic liquidity there could be cuts in the bank reserve requirement ratio. Domestically, the buffers built-up from tighter macro-prudential measures could be drawn down, such as relaxing loan-to-property valuation ratios and cutting property stamp duty rates (notably in Hong Kong and Singapore).

* In India, more measures to attract capital inflows (raise FDI limits, relax external commercial borrowing limits, issue a non-resident bond) and real sector reforms (coal and gas pricing policy, coal linkage for power projects and other pending legislative reforms) are likely.

* There would also likely be increased fiscal stimulus in most countries, India being the one exception where a weak currency may, in fact, increase pressure on the government to consolidate its fiscal finances.