The US Fed, it is true, has been slightly more definitive in its last meeting, suggesting there is a greater likelihood of a rate hike in September. So, while talking of economic activity expanding, the July statement uses the term ‘indicates’ as compared to ‘suggests’ in June; while talking of underutilisation of labour, the June statement said ‘diminished somewhat’ while the July one removes the ‘somewhat’ and, in the case of the housing sector, the term ‘some improvement’ in June has given way to ‘additional improvement’ in July. Even so, a rate hike in September is nowhere near a given since a lot depends on whether the Fed ‘is reasonably confident that inflation will move back to its 2 percent objective over the medium term’. If oil prices slide further or the dollar strengthens, that could get affected—in any case, this is the 3rd year running when inflation is below the 2% target.
Though Indian markets will certainly be volatile when rates do go up, things are very different from the first time there was taper talk in 2013. India had just 6 months of reserves and the CAD for FY13 was 4.8% of GDP—naturally, markets thought RBI couldn’t defend the rupee, which then collapsed. This time around, the CAD is likely to be in the 1.5% range and the reserves are near 11 months. More important, especially with the Chinese collapse, India is the only game in town for FIIs even with its limited reforms. Also, if the finance ministry/RBI talks are conclusive on linking FII debt limits to the exchange rate—at the time they were last fixed—this alone will mean a hike of $5-6 billion. More reforms will help—it is unfortunate the composite caps for FII/FDI did not include banking and insurance where the most investor interest was—but India is in a relative sweet spot.