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) | 224.5 | 446.2 | 593.1 |
| Forex reserves ($billions) | 252 | 304.2 | 633.6* |
| Reserves to total debt | 112.2 | 68.2 | 107.1 |
| External debt to GDP ratio | 20.7 | 23.9 | 20.11 |
(*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:
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.