From Tapering to Tightening:The Impact of the Fed’s Exit on India

Kaushik Basu, Barry Eichengreen and Poonam Gupta

India Policy Forum, 2015, vol. 11, issue 1, 1-66

Abstract: The episode of volatility starting on May 22, 2013, when Federal Reserve Chairman Ben Bernanke first spoke of the possibility of the US central bank “tapering” its security purchases, had a sharp negative impact on emerging markets. India was among those hardest hit. The rupee depreciated by 18 percent at one point, causing concerns that the country was heading toward a financial crisis. This paper contends that India was adversely impacted because it had received large capital flows in prior years and had large and liquid financial markets that were a convenient target for investors seeking to rebalance away from emerging markets. In addition, macroeconomic conditions had weakened in prior years, which rendered the economy vulnerable to capital outflows and limited the policy room for maneuver. Measures adopted to handle the impact of the tapering talk were not effective in stabilizing the financial markets and restoring confidence, implying that there may not be any easy choices when a country is caught in the midst of rebalancing of global portfolios. We suggest putting in place a medium-term policy framework that limits vulnerabilities in advance, while maximizing the policy space for responding to shocks. Elements of such a framework include a sound fiscal bal- ance, sustainable current account deficit, and environment conducive to investment. In addition, India should continue to encourage stable longer term capital inflows while discouraging volatile short-term flows, hold a larger stock of reserves, avoid excessive appreciation of the exchange rate through interventions with the use of reserves and macroprudential policy, and prepare the banks and firms to handle greater exchange rate volatility.

Keywords: Balance of Payments; Economic Management; Macroeconomic Policy; Macroeconomic Vulnerability; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E58 F32 F33 F38 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.ncaer.org/publication/india-policy-forum-2014-15 (text/html)

Related works:
Working Paper: From tapering to tightening: the impact of the fed's exit on India (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nca:ncaerj:v:11:y:2015:i:2015-1:p:1-66

Access Statistics for this article

India Policy Forum is currently edited by B Ramesh

More articles in India Policy Forum from National Council of Applied Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by B Ramesh ().