Currencies as well as stock markets of emerging economies had feared US Fed would reduce its stimulus and this saw major exodus. The Fed was to decide when and by how much it would scale back its cash injection of $ 85 billion a month.
“This is certainly good news and foreign capital will flow back to emerging markets including Sri Lanka and top blue chips with big foreign shareholding and sought after by funds will get a boost,” analysts said.
Whilst Sri Lanka has been enjoying net foreign inflow of Rs. 19 billion to the Colombo Bourse, with the US’ Fed decision days away, the Colombo Bourse saw net outflows to the tune of Rs. 740 million on Monday and Tuesday, reducing the year-to-date net inflow figure to Rs. 18.5 billion from Rs. 19.2 billion on Friday. However, there was a net inflow on Wednesday worth Rs. 361 million, which was encouraging.
The Colombo Bourse was closed yesterday on account of the Poya holiday and analysts expect investors to re-rate prospects upward when it opens today.
However, other analysts opined the US Fed move was unlikely to revive local investor sentiment. Despite continuous inflows year-to-date, the All Share Index has remained disappointing, with year-to-date gain of only 1%. It had lost much of the gains enjoyed in May of 15%.
Nevertheless, Asian shares and currencies yesterday surged across the board after the Federal Reserve stunned markets and decided not to taper its asset-buying program now, sending global bond yields and the dollar into a tailspin.
From Jakarta to Manila, Tokyo to Sydney, investors celebrated the prospect of prolonged stimulus in the world’s largest economy. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2.2% to a four-month peak.
Lankan forex market analysts also expect the Fed’s move to help the Lankan Rupee apart from other Asian currencies.
The rupee has been falling since early July when foreign investors started pulling out of local bonds as US Treasury yields rose in expectation of a Fed pullback. The currency hit a record low of 135.20 on 28 August, but has recovered since then. It has fallen 3.6% this year.
Reuters has been quoting dealers as saying any reduction by the US Fed may prompt foreign investors to exit Sri Lankan Government securities, which could put the rupee under pressure.
However, Reuters also quoted Central Bank Governor Ajith Nivard Cabraal on Tuesday saying that Sri Lanka would not be hurt by the Fed’s tapering.
Cabraal said Sri Lanka had been “cautious in absorbing QE (quantitative easing) funds” and, because it has had a stable market environment, “we are ready to face the Fed tapering”.
“Our currency has been stable even in the light of turbulent upheavals in many other currencies in recent times,” Cabraal said.
India’s Finance Ministry’s top economic adviser Dipak Dasgupta said the country could enjoy a 0.5-percentage-point boost to its economic growth in the near term thanks to the US Fed’s surprise decision to delay winding down its monetary stimulus.
“It was a huge surprise, huge surprise,” Dasgupta told Reuters. “It has been a very positive decision.”
“I think from our growth perspective this decision by itself has the potential to add about 50 basis points to our growth in the near term,” he added.
India’s Bombay Stock Exchange’s Sensex surged over 3% on Thursday with the benchmark index marking its highest close in nearly three years, led by banks, after the U.S. Federal Reserve surprised the markets by sticking to its stimulus plan.
The Sensex surged 3.4%, or 684.48 points, to end at 20,646.64, after earlier rising as much as 3.9%, marking its highest level since November 11, 2010.
The broader Nifty rose 3.7%, or 216.10 points, to end at 6,115.55, marking its highest close since May 2013.