We Are Now Better Prepared To Deal With “Mild Taper”: Chidambaram

Though the US Federal Reserve has gone ahead with its much-hyped and much awaited decision of QE3 tapering, the Indian government seems to be better prepared this time. Immediately after the Fed’s announcement of what was later hailed as a “mild taper”, the Indian Finance Minister P Chidambaram held a discussion with the RBI Governor Raghuram Rajan to take stock of the situation and the repercussions, if any, on the Indian economy.

The FM clearly knows the importance of the Federal Reserve’s announcement, and wasted no time in issuing a “don’t worry” message. In his statement, Chidambaram said, “The government is of the view that the markets had already factored in the U.S. Federal Reserve’s decisions and therefore is not likely to be surprised by these moderate changes”.

While the Fed’s decision has come much earlier than expected, its plan to curtail the monthly security purchase by USD 10 billion doesn’t seem like it will have much impact on the emerging markets, including India. Markets participants were expecting tapering to start from February-March 2014. Bitten by the tapering bug after May 2013, which saw the rupee nosedive from 54 per USD to a historic low of 68.85 per USD, the government has taken many steps in the past 2-3 months and curtailed its Current Account Deficit (CAD).

The government had set a target of Rs 56 billion for CAD in the current fiscal. As the impact of steps taken by the RBI, SEBI and government to contain CAD are becoming evident, the Finance Minister tried to persuade the markets that the impact won’t be that bad this time. “We are better prepared than in May 2013 to deal with the consequences, if any, of the US Federal Reserve’s decisions”, Chidambaram said. He highlighted the Fed’s statement that there will not be any “sequential reduction” and cutting the stimulus from USD 85 billion to USD 75 billion per month is a “mild reduction”.

At this crucial juncture of the Indian economy, when the Congress-led UPA has hit a rough patch as far as its popularity is concerned and it has already faced a humiliating defeat in 4 state assembly elections, the Ministry know that any financial turmoil triggered by US tapering will certainly upset the apple cart. No wonder the FM was immediately galvanised into making its own statement. In fact, the government and the RBI both launched into firefighting mode and put out a stance that the economy is now well prepared to tackle this issue. The government appears to be maintaining the position that as the Federal Reserve has itself said that it will continue its security purchase exercise until the labour market outlook improves substantially, India need not to fret on the matter.