Govt. Overconfident About Tackling Tapering Problem?

During the second quarter of this fiscal, mere concerns of an expected taper by the US Federal Reserve inflicted a fair amount of damage on the Indian rupee and the bourses. The currency tumbled from around 54/USD to a historic low of 68.85/USD, while the markets dipped continuously with each paisa drop in the rupee.

India’s debt market was particularly impacted. The bond yield rose sharply and the average yield on securities has spurt from 7.63% in Q1 to 8.56% in Q2, a rise of 93 basis points in a matter of 3 months. In fact, there has been an unprecedented flight of capital from the debt market so far in FY14, with FIIs moving out Rs 52343 crore from the debt market till now. Despite the turbulence seen in the Indian economy over tapering rumours, the government seems confident (even overconfident) as regards its ability to tackle the tapering problems that may surface next year.

The government’s stance also became evident in recent times, when a question was raised regarding the measures that government has taken for tackling the tapering issue was raised in the Lok Sabha. Minister of State for Finance, Shri Namo Narain Meena, in a written reply to the question, said that as the government has lowered the Current Account Deficit (CAD) considerably, which is expected to touch USD 56 billion during the current fiscal, the impact of actual tapering is expected to be much lower than that occurred during the post-May 2013 period. The minister accepted that during late May 2013, fears of QE tapering led to substantial FII outflows from emerging markets including India. For this reason, those economies that had high CAD witnessed a sharp fall in their exchange rate.

The Finance Ministry is of the view that following the various measures taken by the government, the RBI and the SEBI to facilitate capital inflows and stabilise the foreign exchange market, the positive impact of these is now clearly visible. On one hand, the rupee has seen a steady recovery, with an appreciation of 8.8% as on December 9, 2013 over end-August 2013. On the other, India’s foreign exchange reserves, which had fallen to USD 275.5 billion at the end of August 2013, have started the re-building process and increased to USD 295.7 billion as on December 6, 2013.

In a recent interview with DSIJ, Planning Commission Deputy Chairman Montek Singh Ahluwalia also asserted, “I think there are reasons to believe that even when the taper starts, we may not necessarily have the same impact. Some of this impact is due to nervousness, and is already reflected in the market. When they go in for a taper next time around, it will not be a shock. In fact, markets have already been expecting it. Nobody really knows, but I am really hoping that there will not be a problem”.

Experts are also of the opinion that measures like liberalised FDI norms for select sectors, offering banks a window to swap fresh FCNR(B) dollar funds with the Reserve Bank, increase in the overseas borrowing limit from 50 to 100 per cent of the unimpaired Tier I capital of banks and permission to avail of ECB under the approval route from their foreign equity holder company has helped to tame the rupee decline. Of course, the exact outcome and effect of tapering would be known only when it becomes a reality. The Indian economy holds billions of dollars, both in debt and equities, and foreign inflows remain crucial. In such a situation, the government’s confidence is not well-founded.