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

Basu, Kaushik ; Eichengreen, Barry ; Gupta, Poonam

World Bank Group, Washington, DC

关键词: ADVANCED COUNTRIES;    ADVANCED ECONOMIES;    ASSET CLASS;    ASSET CLASSES;    ASSET PRICES;   

DOI  :  10.1596/1813-9450-7071
RP-ID  :  WPS7071

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

The "tapering talk" startingon May 22, 2013, when Federal Reserve Chairman Ben Bernankefirst spoke of the possibility of the U.S. central bankreducing its security purchases, had a sharp negative impacton emerging markets. India was among those hardest hit. Therupee depreciated by 18 percent at one point, causingconcerns that the country was heading toward a financialcrisis. This paper contends that India was adverselyimpacted because it had received large capital flows inprior years and had large and liquid financial markets thatwere a convenient target for investors seeking to rebalanceaway from emerging markets. In addition, India'smacroeconomic conditions had weakened in prior years, whichrendered the economy vulnerable to capital outflows andlimited the policy room for maneuver. The paper finds thatthe measures adopted to handle the impact of the taperingtalk were not effective in stabilizing the financial marketsand restoring confidence, implying that there may not be anyeasy choices when a country is caught in the midst ofrebalancing of global portfolios. The authors suggestputting in place a medium-term policy framework that limitsvulnerabilities in advance, while maximizing the policyspace for responding to shocks. Elements of such a frameworkinclude a sound fiscal balance, sustainable current accountdeficit, and environment conducive to investment. Inaddition, India should continue to encourage relativelystable longer-term flows and discourage volatile short-termflows, hold a larger stock of reserves, avoid excessiveappreciation of the exchange rate through interventions withthe use of reserves and macroprudential policy, and preparethe banks and firms to handle greater exchange rate volatility.