scorecardresearchNo major foreign exchange outflows expected after US Fed taper

No major foreign exchange outflows expected after US Fed taper

Updated: 03 Feb 2022, 03:42 PM IST

The US Fed taper plan unlikely to trigger major fund outflows, the economic survey indicated, as the US central bank is geared to double its pace of scaling back of bond buying programme

Foreign exchange reserves have accumulated to over $633 billion in recent months.

Foreign exchange reserves have accumulated to over $633 billion in recent months.

It is not the earthquake that kills people but the poorly built buildings. Similar is the case with economic crisis — when the economic fundamentals are robust, markets can easily tide over any crisis regardless of its gravity. 

With a massive foreign exchange reserves of $633 billion and a lot of policy room to deal with, India is currently in a far better situation to deal with normalisation of monetary policy by central banks such as US Federal Reserve.

The confidence and conviction of facing normalisation of monetary policy comes from the strong macro-economic fundamentals, asserts Economic Survey 2021-22. 

One good news is that large foreign exchange reserves accumulated to over $633 billion in recent months. This gets further impetus by a significant improvement in key indicators relating to reserves including reserves to total external debt, debt to GDP ratio, in the first half of the current fiscal when compared to 2013-2014, the year of previous tapering.


External vulnerability indicators:

Key indicators           2009 (Global crisis)2014 (Fed taper)H1 2022
External debt ($billions)224.5446.2593.1
Forex reserves ($billions)252304.2633.6*
Reserves to total debt112.268.2107.1
External debt to GDP ratio20.723.920.11

(*as on Dec 31, 2021)


Immediately after the taper tantrum in 2013, India experienced portfolio outflows amounting to 79,375 crore from capital markets, including 19,165 crore from equity markets and 60,210 crore from debt markets in nearly four-month period ending August 30, 2013.


Muted impact

In fact, the recent announcement of reduction in asset purchases by the Fed Reserve in November last year triggered a toned-down impact on portfolio outflows amounting to a total of 34,178 crore comprising 29,168 crore from equity markets and 5,010 crore from debt markets between Nov-Jan 20, 2022.

Besides, India saw a current account surplus of 0.9 per cent in the first quarter of FY 22 on top of similar surplus in 2020-21 after a gap of 17 years.

To highlight the resilience of Indian economy during the current Fed tapering, the survey pointed out:

"While acknowledging India’s transformation from being among the fragile five countries in the wake of the earlier episode to the fourth largest forex reserve holder during the current episode, Indian economy stands guard with an added advantage of plenty of policy room for manoeuvring."

After the pandemic rattled the global financial markets in early 2020, the US Federal Reserve started buying securities amounting to a total of $120 billion every month since June 2020 — $80 billion of treasury securities and $40 billion of agency mortgage-backed securities (MBS).

Then a year later in July 2021, the Fed Reserve signalled that it would start rolling back the bond purchases — a move that was made official on November 3, 2021 when Federal open market committee voted to scale back asset purchases.

First Published: 03 Feb 2022, 03:42 PM IST