Editorial: Tapering fears

Dec 20 2013, 02:33 IST
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SummaryThe world, and India, are better prepared this time

A few months ago, when US Fed chairman Ben Bernanke spoke of the possibility of a taper, even while promising to keep short-end interest rates very low, global markets tumbled and, in India, foreign investors withdrew $7.1 billion in one monthóaround $5.4 billion was from the debt markets and the rest from equity marketsóto invest back in the safety of developed country markets. The anytime-now taper fear saw withdrawals continue, albeit at a lower pace, and another $5.4 billion was withdrawn over the next two months, taking the rupee tumbling all the way down to a lifetime low of 68.825 to the dollar in late-August. It didnít help that the current account deficit was looking like it was going to cross 6% of GDP for the year, and speculators were taking all manner of positions against the rupeeóno matter how outlandish the number, 70 or 75, it got credibility.

That was then. Now, things look very different. For one, with the US second quarter growth being revised up dramatically to 3.6%ófrom 2.8% earlieróand the composite European PMI up to a

30-month high at 52.1 in December, the global economy looks a lot stronger. At 1.1 million, private housing starts in November in the US were 23% above those in October and 30% higher than those a year ago; at over 200,000 in November, fresh jobs creation was much higher than Septemberís 175,000. Most important, with a budget agreement between the Republicans and the Democrats, the chances of another US shutdown look remoteóchances are this played a very important role in the Fedís taper decision. Not surprising then that, this time around, there were no stock market crashes across the world, indeed the Dow rose 1.84%, S&P 500 1.66%, Nasdaq 1.15% and the FTSE 0.90%. Across Asia, however, apart from Tokyo which rose 1.01%, other markets fellóthe Sensex fell 0.73%óin anticipation of investors once again pulling out funds.

If stock markets in India didnít completely tank, the reason is that despite the economic gloom, certain parameters look decidedly better. For one, with Q2 CAD at a mere 1.2% as compared to Q1ís 4.9%, the yearís CAD is more likely to be in the 2.7% range, a number that is easily financed. From a time when it looked like India would rapidly run out of dollars and not be able to finance its short-term debt renewals, RBIís swap scheme for both

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