After its two day meeting, the US Federal Reserve will decide what it does as far as its quantitative easing programme (QE3) is concerned. Read more about QE3 here
The Federal Reserve Chairman Ben Bernanke will announce whether the Fed needs to scale back its QE3 or asset purchase programme. The Fed has been buying assets worth $85 billion each month to push economic growth in the US. Since the economy has shown smart recovery, the US Fed Reserve might want to scale back its asset purchase programme and reduce it.
Markets are expecting the Fed to scale it back by around $10 billion. Any amount more then this would not be good news for the markets.
Why is the Fed QE3 decision important for the Indian markets and rupee?
An asset purchase programme or QE3 results in the Fed Reserve pumping money into the economy. This results in huge liquidity into the US Markets and this liquidity finds its way into emerging market equities, which also helps support their currencies.
India has received huge amounts into its stock markets, thanks to the Fed Reserve's QE3 programme. This also helped support the Indian rupee. Once this liquidity is withdrawn it would result in money being pulled out of markets, particularly emerging markets like India. This would result in our stock markets falling and the rupee following suit.
In any case, for India it is an extremely important event. We need to wait until Wednesday to see what the decision on the Fed tapering world be. Until then, it's best to stay away from the markets.