India, China face fallout as US cuts interest rates
Saturday, 3 November 2007
Cherian Thomas and Nipa Piboontanasawat
India and China may be forced to further restrict bank lending as declining U.S. interest rates prompt investors to pump record cash into the world's two fastest-growing economies.
Reserve Bank of India Governor Yaga Venugopal Reddy, who yesterday ordered lenders to set aside more deposits for a fourth time in 2007, said inflows from abroad accelerated after the Federal Reserve lowered rates on Sept. 18. Economists expect China to ask banks to hold more deposits as reserves for a ninth time this year, as the Fed prepares to cut rates again today.
The Fed's actions threaten to spur inflation in India and China, where stocks have soared to records as a stampede of foreign money stokes share and property prices. Chinese and Indian shares have added $882 billion since the U.S. reduced rates, almost a third of the $3 trillion gain in their combined market capitalization this year.
``If the U.S. cuts rates, it will have Asia's blood on its hands,'' said Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. ``The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.''
The U.S. central bank, which cut its key federal funds rate by 50 basis points last month, may follow up with a further quarter-point reduction today to 4.5 percent to avoid a recession, according to the median forecast of 108 analysts.
Traders have raised the odds of a rate cut, with some even expecting a half-point reduction, after the U.S. housing slump cost the world's largest financial institutions more than $30 billion in the third-quarter.
Merrill Lynch & Co., the world's biggest brokerage, reported a $2.24 billion third-quarter loss, six times what the firm forecast three weeks earlier, as subprime mortgages, asset- backed bonds and loans went bad. Merrill yesterday ousted Stan O'Neal as chairman and chief executive officer.
As investors look for havens in Asia, the stock markets of China and India have more than doubled their market capitalization this year. Prices of some apartments in Mumbai, India's financial capital, match those in Manhattan. In Shenzhen, the Chinese city which borders Hong Kong, average new home prices soared 18 percent in August.
``The People's Bank of China will turn to raising banks' reserve requirements again,'' said Suan Teck Kin, an economist at United Overseas Bank Group in Singapore. ``The U.S. rate cuts would widen the spread and make investing in China more attractive.''
Foreign investors are flocking into China and India to also gain from their surging economic growth. China's $2.7 trillion economy, which contributes a tenth of global growth, has expanded more than 11 percent for the past three quarters. India's government expects its $906 billion economy to grow an annual 9 percent for the third straight year.
People's Bank of China Governor Zhou Xiaochuan has raised the reserve limit for its lenders to 13 percent from 9 percent at the start of the year. The Reserve Bank of India yesterday lifted its cash reserve ratio for the fourth time this year to 7.50 percent, a 225 basis point increase from January.
``India is not done yet,'' said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore, who expects a further 50 basis point increase in the cash reserve ratio. ``The Reserve Bank is not going to be in for an easy ride over coming months.''
The proportion of analysts who expect India's central bank to use the cash reserve ratio as a tool to drain excess cash from the economy and fight inflation is rising.
More than half of economists surveyed by Bloomberg News expect a further half-point rise. That compares with a tenth of economists who accurately predicted July's increase and a third who got it right on yesterday's decision.
Foreign funds bought a net $259.6 million of Indian shares yesterday even after the stock market regulator last week took steps to restrict share purchases by overseas investors.
These investors have bought $18.97 billion of stocks and bonds this year, double the record $9.46 billion in 2005. That's driven India's benchmark Sensitive index 45 percent higher this year to a record and the rupee by 12.6 percent.
``We expect capital inflows into India to remain strong, backed by robust economic growth, high interest rates and sound economic fundamentals,'' said Sonal Varma, India economist at Lehman Brothers Securities Ltd. in Mumbai.
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Boomberg
India and China may be forced to further restrict bank lending as declining U.S. interest rates prompt investors to pump record cash into the world's two fastest-growing economies.
Reserve Bank of India Governor Yaga Venugopal Reddy, who yesterday ordered lenders to set aside more deposits for a fourth time in 2007, said inflows from abroad accelerated after the Federal Reserve lowered rates on Sept. 18. Economists expect China to ask banks to hold more deposits as reserves for a ninth time this year, as the Fed prepares to cut rates again today.
The Fed's actions threaten to spur inflation in India and China, where stocks have soared to records as a stampede of foreign money stokes share and property prices. Chinese and Indian shares have added $882 billion since the U.S. reduced rates, almost a third of the $3 trillion gain in their combined market capitalization this year.
``If the U.S. cuts rates, it will have Asia's blood on its hands,'' said Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. ``The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.''
The U.S. central bank, which cut its key federal funds rate by 50 basis points last month, may follow up with a further quarter-point reduction today to 4.5 percent to avoid a recession, according to the median forecast of 108 analysts.
Traders have raised the odds of a rate cut, with some even expecting a half-point reduction, after the U.S. housing slump cost the world's largest financial institutions more than $30 billion in the third-quarter.
Merrill Lynch & Co., the world's biggest brokerage, reported a $2.24 billion third-quarter loss, six times what the firm forecast three weeks earlier, as subprime mortgages, asset- backed bonds and loans went bad. Merrill yesterday ousted Stan O'Neal as chairman and chief executive officer.
As investors look for havens in Asia, the stock markets of China and India have more than doubled their market capitalization this year. Prices of some apartments in Mumbai, India's financial capital, match those in Manhattan. In Shenzhen, the Chinese city which borders Hong Kong, average new home prices soared 18 percent in August.
``The People's Bank of China will turn to raising banks' reserve requirements again,'' said Suan Teck Kin, an economist at United Overseas Bank Group in Singapore. ``The U.S. rate cuts would widen the spread and make investing in China more attractive.''
Foreign investors are flocking into China and India to also gain from their surging economic growth. China's $2.7 trillion economy, which contributes a tenth of global growth, has expanded more than 11 percent for the past three quarters. India's government expects its $906 billion economy to grow an annual 9 percent for the third straight year.
People's Bank of China Governor Zhou Xiaochuan has raised the reserve limit for its lenders to 13 percent from 9 percent at the start of the year. The Reserve Bank of India yesterday lifted its cash reserve ratio for the fourth time this year to 7.50 percent, a 225 basis point increase from January.
``India is not done yet,'' said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore, who expects a further 50 basis point increase in the cash reserve ratio. ``The Reserve Bank is not going to be in for an easy ride over coming months.''
The proportion of analysts who expect India's central bank to use the cash reserve ratio as a tool to drain excess cash from the economy and fight inflation is rising.
More than half of economists surveyed by Bloomberg News expect a further half-point rise. That compares with a tenth of economists who accurately predicted July's increase and a third who got it right on yesterday's decision.
Foreign funds bought a net $259.6 million of Indian shares yesterday even after the stock market regulator last week took steps to restrict share purchases by overseas investors.
These investors have bought $18.97 billion of stocks and bonds this year, double the record $9.46 billion in 2005. That's driven India's benchmark Sensitive index 45 percent higher this year to a record and the rupee by 12.6 percent.
``We expect capital inflows into India to remain strong, backed by robust economic growth, high interest rates and sound economic fundamentals,'' said Sonal Varma, India economist at Lehman Brothers Securities Ltd. in Mumbai.
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Boomberg