IDEAS home Printed from https://ideas.repec.org/a/nca/ncaerj/v11y2015i2015-1p1-66.html
   My bibliography  Save this article

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

Author

Listed:
  • Basu, Kaushik
  • Eichengreen, Barry
  • Gupta, Poonam

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.

Suggested Citation

  • Basu, Kaushik & Eichengreen, Barry & Gupta, Poonam, 2015. "From Tapering to Tightening:The Impact of the Fed’s Exit on India," India Policy Forum, National Council of Applied Economic Research, vol. 11(1), pages 1-66.
  • Handle: RePEc:nca:ncaerj:v:11:y:2015:i:2015-1:p:1-66
    as

    Download full text from publisher

    File URL: http://www.ncaer.org/publication_details.php?pID=265
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2010. "Selective swap arrangements and the global financial crisis: Analysis and interpretation," International Review of Economics & Finance, Elsevier, vol. 19(3), pages 353-365, June.
    2. Rakesh Mohan & Muneesh Kapur, 2014. "Monetary Policy Coordination and the Role of Central Banks," IMF Working Papers 14/70, International Monetary Fund.
    3. Kapur, Muneesh & Mohan, Rakesh, 2014. "India’s Recent Macroeconomic Performance: An Assessment and the Way Forward," India Policy Forum, National Council of Applied Economic Research, vol. 10(1), pages 205-295.
    4. Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 494-513, May.
    5. Robert P Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
    6. Poonam Gupta & James P. F. Gordon, 2004. "Nonresident Deposits in India; In Search of Return?," IMF Working Papers 04/48, International Monetary Fund.
    7. John C Bluedorn & Rupa Duttagupta & Jaime Guajardo & Petia Topalova, 2013. "Capital Flows are Fickle; Anytime, Anywhere," IMF Working Papers 13/183, International Monetary Fund.
    8. Michael J. Fleming & Nicholas Klagge, 2010. "The Federal Reserve's foreign exchange swap lines," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 16(Apr).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. PANAIT, Iulian, 2014. "Romanian Financial Market’S Reaction To Fed Tapering Talk During 2013," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(4), pages 19-30.

    More about this item

    Keywords

    Balance of Payments; Economic Management; Macroeconomic Policy; Macroeconomic Vulnerability; Monetary Policy;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nca:ncaerj:v:11:y:2015:i:2015-1:p:1-66. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shilpi Tripathi). General contact details of provider: http://edirc.repec.org/data/ncaerin.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.