No repeat of 2013 taper tantrum: Santosh Rao | Economic Times

This time, Fed tapering would not be as disruptive as in the past. The market is sensing it and the bond market pretty much is telling us that they know what is going on, says Santosh Rao, Head of Research, Manhattan Venture Partners. We knew that sooner rather than later, taper will come. Is this something that the markets have already digested or do you see more room for the dollar index to rally and yields to spike up as well?The signals are still crossed and there is no sure shot sign that the market will go either which way or the Fed will act one way or the other. Still a lot of stuff is going on. A big chunk of the US markets are underperforming in terms of business activity. Coronavirus Delta fear is there. Even the consumer confidence numbers are coming down. All that is kind of on the side that says that the Fed might stay dovish for a while longer. But on the other hand, numbers are going up, the employment numbers are improving, inflation is picking up -- transitory or not is debatable. At this point, if one had to take a bet, it is pointing more and more towards tapering at the early part of next year and not right away. Jackson Hole will tell us hopefully how the Fed is thinking. Last time around when the world was going through a financial crisis, we saw it was difficult for the central banks to taper and there were actually QE2 and QE3. The very fact that commodity prices are coming down is bound to impact inflation and should help in the pickup of economic activity too?Yes, the commodity market is getting hit with a lot of things going on in the rest of the world; China is slowing down, they are clamping down on few areas of production. They are worried about Coronavirus. On the demand side, the equation is going to get weak and that is also impacting commodity prices. The spike in dollar always impacts commodities. But Fed Chairman Powell has said that it is not going to be an abrupt rise. It is going to be very gradual rise and even if they do anything, there is not going to be the tantrum that we saw last time. So that fear is not there. Powell said he is going to follow the data very closely and so it is going to be very methodical but in terms of commodity prices, we will have to see that the dollar strength is negative, but it has more to do with the global recovery and the Coronavirus. We will have to wait and see how it pans out but in the near term, things are moving in the right direction in terms of reopening and the economy building up. Can I say that tapering will happen but financial markets will adjust to that before the event happens?Absolutely, they will and to a certain extent, the bond markets have already sensed that. Do not forget there is so much tailwind behind this. We are going to have a huge infrastructure package and so there is going to be demand. A lot of people are coming back to work. Things are going to improve and it is going to be a very even process from here. It is not going to be disruptive. Chairman Powell has pretty much said that he has given enough chances for the market to adjust to what he wants to do and that he is very data driven. So, it would not be as disruptive as in the past. The market is sensing it and the bond market pretty much is telling us that they know what is going on.