Taper proof

Thanks to RBI and FM, the specter of imminent fed taper couldn’t haunt markets as it did back in May. 

In what served as a nightmare for Indian economy back in May, when turned real was treated as a business as usual. The much discussed and feared US dollar tapering by Federal Reserve, first announcement of which shook the cores of rupee is finally set to begin from New Year.  Dollar inflows are to be narrowed down in the markets but thanks to the improved level of Current Account Deficit, the difference between outflow and inflow of the foreign exchange, rupee wouldn’t lose its stand against dollar. 

US Federal Reserve Chief Ben Bernanke on Thursday announced to cut down on its monthly dollar minting program by $10bn, bringing it to $75bn dollar. Fed, with an effort to spur growth, had been pumping in cheap money to the tune of $85bn in its economy on monthly basis which in turn also benefitted emerging market economies wherein US investors parked that cheaply acquired money for better returns. India was one of the beneficiaries of this program. However, Fed Chief announced to taper off liquidating dollars in May 2013. Mere his words were enough to scare the investors though final decision was yet to be taken. Foreign Institutional Investment (FIIs) began flocking out depreciating rupee’s value against dollar, which touched its all time low in August at Rs. 68.85 per dollar. It is only after drastic measures taken by Reserve Bank of India and Finance Ministry to attract dollars and cut down on imports that rupee could be strengthened.

In this background, it is surprising that panic-stricken response shown by markets back then didn’t come to pass now, now when taper is certain and just round the corner. To compare the current scenario from May, India is better placed at all fronts. First, the time and pace of taper was uncertain then which is not only clear but bearable at $10bn reduction a month. Secondly, India’s foreign reserve and CAD have improved a lot. The unprecedented surge in gold imports of earlier times could be controlled including few other non essential and expensive imports. CAD narrowed sharply to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of 2013-14 which hovered around 4-5% in the previous quarters. In addition, RBI’s move taken in Sep 2013 to ease it for banks to run Foreign Currency Non-residents (banks) deposit scheme has also played out well. Under FCNR (B) scheme NRIs do not face currency risk; the currency risk is borne by banks. RBI had helped banks reduce this risk so that they attract more of NRIs to make use of this scheme and don’t stay away from offering it in the tight domestic currency scenario. 

These measures apart from turnaround in exports have made Indian economy resilient enough to face imminent outflows of dollars. Initially rupee might lose traction against dollar but that wouldn’t be severe and wouldn’t sustain for long. Considering US economy is back on growth trajectory, fed taper can instead be positive for India in a sense that demand boost in US will drive export growth of Indian export enterprises having business in US. That is double dose good news for them as lately they are already reaping benefits of surge in exports.

The specter of Fed Reserve taper is no more there to haunt. India’s external front is under control for now. It is time that all efforts are put to reduce notoriously high inflation, the pivot of economic growth cycle and thus boost industrial production bringing jobs and growth in the country.