Liquidity Withdrawal by Global Central Banks:
Over the recent year, global liquidity has become the key point of international policy debate. Recently a huge change occurred in liquidity in the global bond market. That’s why the central bank starts moving towards reducing stimulus.
All the main banks are making the market ready for gradual withdrawal that comes under accommodative monetary policies. These banks include the US Federal Reserve, Bank of Canada, and the Bank of England.
Nowadays, the global economy is going through a big change. We can see a synchronous growth in the economy. The labor market is increasing and improving day by day. Inflation is running below according to the central bank target.
Although inflation has picked up in recent times, it is not as desired as the market. The level of inflation is still below most developed economies.
The US federal open market community shows some split over inflation. It is discussed in the June policy of the community. The news of a shift into monetary policy leads to both the stock and forex markets.
The bank of Japan and the European central fixed a schedule to meet on July 20. And the Fed interest rate decision comes on the date July 26. However, the US economy declared that the US economy is good enough with the increased rate of the Fed. Also, it is expected that the Fed will decrease its rate after some time.
And the Fed decreases the interest rate to low for the longer term. India will surely benefit from this low interest. In all the major economies, India’s interest rate will remain regime.
Recent data show that intestinal production growth is lower in India. And this falling inflation price is good for India’s reserve bank. The marketers very well know that the low rate period will end sometime.
Sudden changes in yield expectations will bring volatility to the stock market. However, the Indian market doesn’t affect it much because the fundamentals of the Indian market are strong.
The Indian central bank shows that they are going to drain some liquidity. The government plans to do this change in Feb. This is the step to get back to the economy on the highly decreased track because of covid 19.
What Changes Does the Indian Market Face Because of Liquidity Withdrawal?
- The Indian market lost a 2% share, which is the lowest amount since April 30. It is the biggest fall ever in the Indian market. The fall down of Sensex is about 1,158.63 points or 1.89%, and nifty fall is about 1.94% to close at 17,857.25.
- Both of them see the biggest fallout since April 30. Most ASEAN says that it is tough to get over the covid 19 and make inflation harder. Not only India but every developed economy is also facing the same issue.
- Japan’s Nikkei has lost around 1%, and Hang Seng in Hong Kong has fallen over 0.3%. On this incident, RBI said they would arrange a seven-day and 28-day auction called variable rate reverse repo. It is worth 1.5 trillion and 50,000 crores. They are going to hold it on November2.
- The Central Bank is making this strategy so that the market will not fall because of inflation. The VRRR strategy will help the market to get over inflation. The main highlight is that the RBI is worried about excess cash that is about 7.5 trillion.
- Indian companies like Nykaa and Paytm are increasing their internal share sales. Nykaa raised around 5,320 crores, and Paytm raised about 18,300. India has some most expensive models in the market.
- On October 25, Nomura declared that the Indian market was neutral overnight. There are some unfavorable risk rewards. Japanese brokerage firm looking for a better entry in India.
- On October 29, UBS said that the Indian market is overweight and extremely expensive. UBS finds the Indian market less attractive, so India has no chance to rebound its economy.
- In the last five sessions, Foreign institutional investors are sell-out Indian equities that are worth $1.47 billion. And coming to the FIIs, it sells out equities worth $970.82 million.
Liquidity Withdrawal affects the world economy very well. The stock market is hardly getting over the covid 19 that inflation is coming in the market. We discussed some major changes earlier in the Indian economy because of Liquidity Withdrawal.