Fed to end QE; India looks attractive amongst EMs: Experts

He thinks the global economy is ready for new approaches and the consensus has now started to move towards where liquidity injected by bond purchases is not having much impact or at least incremental impact in the US. He believes the US banking system now is in better position to weather the end of this programme.

Das believes the end of QE is already well priced in and the focus would now surely be on Fed’s tone on interest rates. However, as per consensus expectations, he too expects Fed move gradually on interest rates by July 2015.

According to Das the US recovery is robust compared to other high-income countries but it is not as robust compared to previous US recoveries. He feels the US is not yet returning to the 3-3.5 percent growth because the potential growth may have suffered as a result of financial crisis. So the Fed is not likely to move very aggressively on interest rates.

Talking about the Fed decisions impact on India Palmer says, India is unlikely to be impacted negatively from anything that Fed does in the next six months. India will be impacted only by domestic inflation and global crude prices, but at present both are trending down, he added.

Das says the global environment has become much more accommodative towards India and there seems to be a lot of things happening on domestic and international front that are quite positive - things like lower inflation, lower commodity prices etc.

So, in this environment of low global growth, low inflation, and falling commodity prices investors are looking at countries that offer better growth prospects and higher returns, wherein India stands out in that regard from the emerging market space.Below is the transcript of Arnab Das and Christopher Palmer's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.Menaka: This will be the first time in three years starting here onwards that the Fed will no longer be buying bonds as part of its quantitative easing programme but the sense is that the bond markets at least in the US have priced this in a long time ago?Palmer: It may be the first time that the Fed is not going to be buying bonds or at least announcing schedule for not buying bonds but it is not the first time that they have talked about it and that is really the key to guiding. Investor expectation is that they have been talking this up for better part of 18 months and finally getting around to it now. They will balance that message by talking about the very low rate of inflation and realistic possibility of deflation in certain parts of the US economy.Menaka: So do you expect today's event to be a non-event in a sense because this is something that the markets have been expecting, they have priced it in and as long as there is no change in language with regards to when interest rates might start moving up, this might turn out to be a big non-event or do you think there is the slightest chance that like some Fed officials the Fed might even consider continuing with this last leg of USD 10 billion of bond purchases till they feel a little bit more comfortable about the economic revival?Palmer: I am not sure. I certainly agree that after having spoken about the end of the bond purchase programme that they ought to now start moving in order to maintain their credibility. It is important for them to at certain times act on things that they have spoken about. Perhaps the Fed will give the markets more confidence by talking about some of the other measures that they can use to maintain liquidity without direct purchasing of bonds. So, you may see a shift in language towards other instruments as well which I think the markets would be quite interested in.  

Senthil: Do you think the global economy is ready for this?Palmer: I think that the global economy is ready for new approaches given that the consensus has certainly started to move towards one where the liquidity injected by bond purchases is arguably not having much of an impact or incremental impact in the US as it had in the start of the programme. The banks are in better shape for example, so certainly the US banking system is in better position to weather the end of the bond purchase programme. We know that Janet Yellen cares deeply about Main Street. Probably it is looking for some other measures which will make that liquidity have more of an impact at the level of small businesses and the consumer. So, we may see a shift in the message in that direction. In terms of the US financial institutions they are ready for this. I think what has happened in the last few weeks is that Europe is not ready for this and that is part of their balancing act.

Menaka: A very quick first response on whether you think you expect the Fed to say anything out of the ordinary today that could be a market moving situation?Das: That is the key, as your earlier guest was suggesting the end of QE, the completion of tapering is well discussed and well priced and it would take a really very severe shock to change that prospect at this stage. What is going to be the main focus I think is whether the language changes materially or not. Bullard's statement which is little bit offset by the Boston Fed President Rosengren's statement in the other direction is essentially a response to volatility that was generated in the market around the time of the IMF meetings, where the markets all of a sudden started to realise that the Eurozone in particular, and also Japan are having great difficulties restoring growth and inflation to target. Even the United States which is doing well at least in terms of growth and reasonably well in the labour market is experiencing a low and falling inflation rate as well, thanks to a strong dollar in part and also thanks to the not so great state in the end of the labour market. So, those are reasons why the Fed may be more judicious and perhaps slower to raise interest rates than it might otherwise have been if the US recovery were more robust.Menaka: Our colleagues in the US did their regular poll right ahead of the FOMC meeting only to find out that most market participants expect now a rate hike only in July of next year. So, we have seen a lot of volatility in that expectation. It used to be Q3 and Q4, it moved up to Q2 a little earlier this year and now it has gone back to July in that sense. Would you say thereabouts is when you are expecting rates to start moving up in the US as well July 2015?Das: It is very hard to call precisely when the first rate cut will come. As you said that expectation the consensus around that has been moving around and we have moved around our expectation a little bit by few months here or there. I think that is important in itself for the shape and the level of front end of the yield curve and for currencies and so on.I don’t mean to minimise the importance of that for anyone but if we take a step back and think about what's really going on here the underlying reality is that the US recovery is robust compared to the recoveries in other high income countries. However it is not robust compared to previous US recoveries. Put it this way. How many years have we seen that the year opens with consensus forecast for US growth being in the order of at least 3 if not 3.5 percent and as the year unfolds for one shock reason or another, domestic or external those growth expectations, inflation expectations end up being revised downwards. How many times are we going to go through this process before we acknowledge that the US isn’t actually returning to 3.5 percent growth and that indeed potential growth whether or not there is secular stagnation, potential growth may have suffered as a result of the financial crisis. So, if that is the case then the bottomline is the Fed may move a little bit later or little bit sooner but it is not going to move very aggressively. It is going to move relatively slowly and not move up to a very significant level of the Fed Funds rate because the US economy isn’t doing that well compared to its own history. If you have a significant policy divergence between US and the Eurozone, and Japan in particular you are likely to have a much stronger surge in the dollar which will import more disinflation in the economy. That is very important because the Fed for the first time has made note in the minutes of the strong dollar and of global economic conditions rebounding back into the US.

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Menaka: What will all of this mean either in terms of rate movement or currency movement for emerging markets like India? Do you believe that if the Fed doesn’t change language today, does end its QE programme and reaffirms the consensus estimate of a rate hike lets say July onwards next year, that there will be any negative impact on India between now and then?Palmer: I can't imagine there will be any negative impact on India from anything that the Fed does in the next 6 months. I really think that what India needs to do is show that inflation could fall quite rapidly in India and really start to see dividend from the lower oil price. I think that is a much larger factor for what is going to impact India in the next 6 months. So, let’s see how much of that lower energy bill India can capture and put to work in its domestic economy.Menaka: How do you see what the Fed does or doesn't do impacting global fund flows and therefore emerging markets like India?Das: I tend to broadly agree, the global environment has become much more accommodating for India certainly at this time this year as compared to the same time last year. A lot of things are happening on the domestic front which are quite positive and on the international front as was just mentioned falling commodity prices, energy prices in particular.  India is a major importer of all kinds of hydrocarbons and other commodities stands to benefit. Not only is that an important kind of disinflation benefit at the headline level, it is also a kind of contributes to an automatic rebalancing of the Indian economy because it implies that the current account deficit, the trade deficit will be smaller than otherwise also implies a lower subsidy bill. So, there is a fiscal adjustment plus the government has moved to liberalise and deregulate at least diesel prices, hopefully there will be more deregulation on that front taking advantage of this kind of golden window of opportunity.On the Fed itself, the trajectory that both of us are painting is quite positive as well for India which is that the Fed is gradually smoothly finessing the exit from QE and is going to continue with the forward guidance that helps to manage the front end of the US yield curve largely inline with the middle and the long end of the yield curve which are all telling us even as the Fed exits from QE that there isn’t a major inflation problem in the US or in the wider world. If anything the problem is one of disinflation. So, in that environment of low global growth, low inflation, falling commodity prices, investors are going to be desperately seeking countries that offer some inflation, some prospects of accelerating potential and actual growth and therefore some higher returns. I think India stands out in that regard in the emerging markets space as a particularly attractive story. People have been participating in that story already but it is very encouraging especially for me a long time sceptic about India is that people are not selling, and taking profits to cover losses elsewhere in emerging markets. I think investors in the rest of the world see positive signs coming out of India relative to other emerging markets and relative even to China as the largest emerging market and of course relative to the developed world.