Union Finance Minister P. Chidambaram has said that the taper announced by the US Federal Reserve is a mild reduction that the markets had already factored in the decisions and, therefore, are unlikely to be surprised by these moderate changes.
“We are better prepared than in May 2013 to deal with the consequences, if any, of the US Federal Reserve’s decisions,” Mr. Chidambaram said in a statement here.
The statement also said that the Finance Minister spoke to the Reserve Bank Governor Raghuram Rajan on Thursday morning about the Fed’s decisions.
The Fed announced its much-anticipated tapering programme on Wednesday. It has said that from January it will cut back its bond purchases from $ 85 bn a month to $ 75 bn. The Fed also put in a caveat that it would observe the developments taking place and would be open to review if things do not turn out the way it has been assumed now. The assumption being that the US economy is improving and that the unemployment rate has reached the 7 percent threshold limit indicated earlier and would remain in this range from now on.
Quantitative Easing (QE) or the enhanced bond purchase programme was an unconventional mode of intervention by the Fed following the financial crisis of 2008 that led to a surge in liquidity. Debt and equity markets in emerging economies have also been receiving some of these increased dollar flows. The taper in the QE programme, it was feared, will impact the foreign funds flows in to Indian debt and equity markets with consequences for exchange rate volatility and interest rates.
Nearly $13 bn have flowed out from the debt segment of the market from June to November after the tapering announcement was made in May. However, the current account deficit is lower than May and Foreign InstitutionaI Investment (FII) flows into equity are positive for the last three months at $2.3 billion.