Why is the Fed meeting important?

On December 18, the Fed would decide whether it would taper its asset purchase programme or QE3. A partial pullback of the QE3 is likely to impact stocks markets across the globe and also the Indian rupee.

The Fed's asset purchase programme that is estimated at around $85 billion a month, pushes fresh money into the US economy, which finds its way into assets like equities across the globe. When this money is partially withdrawn it could lead to less liquidity, which is likely to pull down stock prices.

Global stock prices have already reacted to worries that the Fed may taper its QE3 programme, beginning this month. The QE3 had been unveiled, primarily to push unemployment lower and growth higher and as the programme seems to be achieving its objective, the US Fed might begin tapering.

The Sensex has posted its biggest weekly drop in a month, despite the markets rallying significantly on Monday, following a strong showing for the BJP in state elections.

The other key event this week would be the RBI's monetary policy slated for Dec 18. The ugly CPI inflation of 11.24 per cent reported for October is likely to force the RBI to hike repo rates or interest rates. A hike in the interest rates does not augur well for the markets and banking stocks are likely to fall even further.

Clearly, it's going to be a difficult week for the stock markets given that the RBI would most certainly hike rates. The Fed outcome on QE3 tapering is not certain though.

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