Though global markets reacted negatively to the January minutes of the Federal Open Market Committee (FOMC) meeting that were released Thursday—some members indicated they wanted the US Fed to ease back on its assets purchase programme—the fears seem exaggerated. For one, easing back on asset purchases was always part of the Fed’s stated policy once it looked clear the US economy was back on track. There is nothing in the minutes to suggest any new conditions have been put in place, indeed some analysts have said the January FOMC minutes appear a bit more dovish than the December meeting minutes. Indeed, while global risks look a little less pronounced at the moment, and the US looks stronger than it has for a long time, reaching the Fed GDP forecast for the year looks a bit of a stretch. In which case, the chances of any significant easing in Fed policy for the rest of the year look low. Perhaps why the discussion in the FOMC meeting didn’t contain any reference to the Committee’s view of the date by which time the Fed should stop purchases of assets.
But if the US economy does recover faster than expected, liquidity will ease and there can be little doubt that, in the initial phase at least, funds flows to emerging markets like India will take a hit. Given how India’s current account deficit is so fragile, and is so vulnerable to global risk-on and risk-off moments, this puts an extra burden on India’s economy