India’s economy is much better placed today and is far more resilient in comparison to 2013 to withstand the impact of a possible repeat of the US taper tantrum, experts said. India’s economic fundamentals, backed by strong foreign exchange reserves, better debt-to-GDP ratio, comparatively low inflation and high growth rate, show that the country’s economy is well insulated to manage any significant volatility.
Earlier, in 2013, the US Federal Reserve announced withdrawing quantitative easing. The policy was aimed at reducing liquidity from the market with the US Fed slowing the pace of its purchases of Treasury bonds. This announcement by the then Fed chairman Ben Barnanke led to a panic in markets, leading to a hike in Treasury yields. Investors dumped investments in emerging markets like India in favour of safe-haven US Treasury bonds.
This time too, the US Fed intent seems to have spooked investors. India’s benchmark 10-yr bond yields soared to 6.9% last week, from about 6.3% in November.
Strong economic fundamentals today in comparison to 2013
“We are nowhere near that kind of condition (2013 taper tantrum) for a simple reason that we have much better macroeconomic stability. Right now inflation is under control, we have much better external balance. In fact, the taper tantrum happened when inflation was high at around 10-11%, CAD was mostly 5% or 6% and growth was around 5%. Forex reserves are also much better,” NR Bhanumurthy, Vice-Chancellor at Ambedkar School of Economics University told Financial Express Online.
India is currently the fourth largest foreign exchange reserves holder in the world after China, Japan and Switzerland. The forex reserves are currently at $633.6 billion as at end-December 2021, in comparison forex reserves were nearly half of the current levels at $304.2 billion in 2014 fiscal after the taper tantrum incident. While the external debt-to-GDP ratio, which compares total external debt to country’s GDP, stands at 20.1. In the 2013-14 fiscal, it stood at 23.9.
Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank said the external sector vulnerability matrix remains far more comfortable to provide adequate buffers to manage any significant volatility. While QuantEco Research said monetary policy peer pressure would be less of a constraint for India as it is expected to remain well insulated to any 2013 style-taper tantrum episode if repeated. “This is on account of relatively better domestic macros (higher growth and lower inflation mix at present vis-à-vis 2013) and a strong FX Reserve cover of USD 636 bn currently that corresponds to about 13 months of import cover,” the research firm said.
Muted impact on capital markets from Fed tapering
Last year, Fed chair Jerome Powell announced that the central bank would start reducing its large-scale asset purchases, i.e. ‘tapering’ of its policy, which it announced in response to coronavirus-led mayhem in financial and economic conditions. In January, the Fed indicated that it could hike interest rates as early as March in view of historic high levels of inflation.
Indian capital markets lost Rs 34,178 crore to portfolio outflows, including Rs 29,168 crore from equity markets, since the US Fed announcement of 3 November 2021 about asset purchase reduction, the Economic Survey 2022 said recently. This is significantly less than the Rs 79,375 crore outflows from capital markets in 2013, including Rs 19,165 crore from equity markets and Rs 60,210 crore from debt markets, the survey said.
Road Ahead: Upwards and onwards
Kotak’s Upasna Bhardwaj said the country’s economic recovery is underway though it is gradual. Public investment and exports have been the key drivers. “We expect the governments’ capex thrust, incentives for localization and inclusive approach to help set the ball rolling for pick up in private investment and demand,” she added. Further, India’s FDI attractiveness provides for more resilience against foreign portfolio outflows, NR Bhanumurthy said. “We are only worried about foreign institutional investment – the short term capital investment. But I think this time we are in a better position to attract more foreign FDI. FDI is a major factor for aiming for higher growth,” he said.