Could this trigger second round of recession?

US Federal Reserve, the most important monetary body in the world concluded its two day meeting yesterday. No one was expecting any surprises on the interest rate front. And the script unraveled as per expectations. The Fed maintained interest rates at near zero levels and vowed to do so for an extended period of time. But there was another important development. The Fed signaled its intention of unwinding the massive monetary stimulus that it had undertaken during the peak of the crisis.

In other words, it restated its intention to stop buying US$ 1.25 trillion worth of mortgage backed securities in March. Now, this is likely to be a watershed event in global financial history. It should be remembered that stimulus unwinding of this magnitude has never taken place in history before. And hence, the US Fed may not be quite aware of how to go about it. The Fed has certainly not given any indications of how or when it plans to start pulling back the enormous money it has pumped into the economy over the last two years.

But there is every chance that a mistake could be made. The money involved is huge and the economic recovery still fragile. So, is the transition going to be smooth or will the world's largest economy head into another recession on account of the US Fed not injecting any more liquidity in the system? Our bet is more on the latter than the former. And if it indeed does happen then what happens to Indian stocks? Well, there could be impact no doubt. But it will be restricted to Dalal Street and not impact Main Street a great deal. In other words, it could turn out to be a good opportunity to invest in the Indian long term growth story.