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From tapering to tightening : the impact of the fed's exit on India

Author

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  • Basu,Kaushik
  • Eichengreen,Barry J.
  • Gupta,Poonam - DECOS

Abstract

The"tapering talk"starting on May 22, 2013, when Federal Reserve Chairman Ben Bernanke first spoke of the possibility of the U.S. central bank reducing 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, India's macroeconomic conditions had weakened in prior years, which rendered the economy vulnerable to capital outflows and limited the policy room for maneuver. The paper finds that the 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. The authors 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 balance, sustainable current account deficit, and environment conducive to investment. In addition, India should continue to encourage relatively stable longer-term flows and discourage 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 J. & Gupta,Poonam - DECOS, 2014. "From tapering to tightening : the impact of the fed's exit on India," Policy Research Working Paper Series 7071, The World Bank.
  • Handle: RePEc:wbk:wbrwps:7071
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    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. 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.
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    5. Muneesh Kapur & Rakesh Mohan, 2014. "Monetary Policy Coordination and the Role of Central Banks," IMF Working Papers 2014/070, International Monetary Fund.
    6. 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.
    7. Petia Topalova & Mr. Jaime Guajardo & Mr. John C Bluedorn & Rupa Duttagupta, 2013. "Capital Flows are Fickle: Anytime, Anywhere," IMF Working Papers 2013/183, 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).
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. L’Inde dans l’attente du tapering
      by ? in D'un champ l'autre on 2014-11-01 03:59:00
    2. Les pays émergents peuvent-ils dompter le cycle financier mondial ?
      by ? in D'un champ l'autre on 2014-11-09 04:59:00

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    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.

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    More about this item

    Keywords

    Economic Theory&Research; Macroeconomic Management; Debt Markets; Emerging Markets; Currencies and Exchange Rates;
    All these keywords.

    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

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