Yellen effect: India, US equity markets rally as tapering fears ease

New York: Indian stocks rose with global equity markets on Thursday after Janet Yellen, President Obama’s choice to lead the Federal Reserve, said the US economic recovery still needs support from Fed stimulus. Yellen’s pro-stimulus comments signaled that the Fed would most likely maintain its ultra-easy monetary policy in the near-term.

The 30-share BSE Sensex gained 205.02 points on Thursday, up as much as 1.02 percent, to close at 20,399.42. It recovered from an oversold state after seven consecutive days of declines on easing fears of near-term tapering by the US Federal Reserve. The broader NSE index gained 1.65 percent.

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The Dow Jones Industrial Average finished the day up 54.59 points, or 0.35 percent at 15876.22.

Indian stocks are being lifted not only by the US delay in tapering quantitative easing but also RBI governor Raghuram Rajan, who raised interest rates in an attempt to bring India’s soaring inflation under control.

“We are currently overweight in India in a number of our funds,” Luke Richdale, client portfolio manager in the emerging markets team of JPMorgan Asset Management, told the “Financial Times.”

Answering questions before the Senate Banking Committee, Yellen made it plain that the Federal Reserve was likely to embrace gradualism when it comes to tapering. Yellen offered little new information about the Fed’s short-term plans, although she made clear that she remained a staunch supporter of its stimulus campaign.

“I consider it imperative that we do what we can to promote a very strong recovery,” Yellen told the senators.

“The Fed’s bond purchases have made a meaningful contribution to economic growth and improving the outlook,” she added.

If approved by the Senate, Yellen, 67, will be the first woman to head the world’s most influential central bank in its 100-year history. Yellen, an advocate for aggressive stimulus, will succeed Bernanke, who is set to step down on January 31.

Yellen spent much of her testimony on Thursday tackling senators’ questions about bank capital, insurance regulation, asset bubbles, gold prices, income inequality and other subjects. Of course, the primary point of scrutiny in the hearing was the Fed’s bond-buying program.

Yellen said the decision about winding down the program depended on how the US economy performs. “We have seen meaningful progress in the labor market,” Yellen said. “What the Fed is looking for is signs that we will have growth that’s strong enough to promote continued progress.”

Fed officials are trying to decide “at each meeting” whether the moment is right to begin trimming the bond purchases, she told members of the Senate Banking Committee. “There is no set time.”

All eyes are on the Fed’s next meeting in December 17-18. Taper terror grew after Federal Reserve Bank of Atlanta President Dennis Lockhart told reporters the central bank would consider reducing its bond-buying program at next month’s Federal Open Market Committee meeting.

Critics of the Fed’s bond-buying program have questioned the benefits and worry it could fuel higher inflation or financial asset bubbles.

Yellen said the benefits still exceed the costs and dismissed worries of a stock bubble. “Stock prices have risen pretty robustly, but I think that if you look at traditional valuation measures…you would not see stock prices in territory that suggests bubble-like conditions,” she said.

Yellen also pushed back against concerns about the cost of the Fed’s purchases.

“How long is too long?” asked Republican Senator Mike Crapo.

Yellen responded that “this program cannot continue forever,” but said that she saw no evidence of the disruptions cited by opponents.

Expectations that the Fed might start to taper its stimulus program have been a concern for the world since May. Battered emerging markets like India got a reprieve when the Fed shocked investors in September by maintaining its cash injections of $85 billion a month in full.

The Fed’s decision in September not to reduce stimulus was a “relatively close call” for policymakers, according to minutes of the meeting that suggested there was still support to trim bond-buying this year.