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

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

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 a...

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Bibliographic Details
Main Authors:	Basu, Kaushik, Eichengreen, Barry, Gupta, Poonam
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank Group, Washington, DC 2014
Subjects:	ADVANCED COUNTRIES ADVANCED ECONOMIES ASSET CLASS ASSET CLASSES ASSET PRICES BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISIS BALANCE SHEET BANK DEPOSITS BANK POLICY BASIS POINTS BOND BOND FLOWS BOND FUNDS BOND SPREADS BOND YIELD BOND YIELDS BONDS BROAD MONEY BUSINESS ENVIRONMENT CAPITAL ACCOUNT CAPITAL ACCOUNTS CAPITAL CONTROLS CAPITAL FLOWS CAPITAL GAINS CAPITAL INFLOWS CAPITAL MARKET CAPITAL MOBILITY CAPITAL OUTFLOWS CAPITAL REQUIREMENTS CENTRAL BANK CENTRAL BANKS COMMODITIES CORPORATE BONDS CREDIT LINES CREDIT RISK CRISES IN EMERGING MARKETS CURRENCY CURRENCY CRISES CURRENCY DEPRECIATION CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT DEFICIT DEBT DEBT FLOWS DEBTS DEFICITS DEPOSIT DEPOSIT MOBILIZATION DEPOSITS DEVELOPING COUNTRIES DIRECT INVESTMENT DOMESTIC BOND DOMESTIC BOND MARKETS DOMESTIC MARKETS ECONOMIC GROWTH EMERGING ECONOMIES EMERGING ECONOMY EMERGING MARKET EMERGING MARKET ECONOMIES EMERGING MARKETS EQUITY FLOWS EQUITY MARKETS EQUITY PORTFOLIO EQUITY PRICES EXCHANGE RATE EXCHANGE RATE MOVEMENTS EXCHANGE RATE REGIME EXCHANGE RATE VOLATILITY EXCHANGE RATES EXPENDITURE EXPORTERS EXPOSURE EXTERNAL COMMERCIAL BORROWING EXTERNAL COMMERCIAL BORROWINGS EXTERNAL DEBT EXTERNAL FINANCING FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL INSTITUTIONS FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL VULNERABILITIES FINANCIAL WEAKNESSES FISCAL BALANCE FISCAL DEFICIT FLEXIBLE EXCHANGE RATES FOREIGN ASSETS FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN EXCHANGE MARKET FOREIGN EXCHANGE MARKETS FOREIGN EXCHANGE RISK FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN RESERVES GLOBAL FINANCE GLOBAL FINANCIAL STABILITY GLOBAL INVESTORS GLOBAL LIQUIDITY GLOBAL PORTFOLIO GLOBAL PORTFOLIOS GOLD GROWTH RATE HIGH INFLATION HOLDING HOLDINGS IMBALANCES IMMOVABLE PROPERTY IMPORT IMPORTS INCOME INFLATION INFLATION ENVIRONMENT INFLOWS OF CAPITAL INSURANCE INTEREST RATE INTEREST RATE DIFFERENTIAL INTEREST RATES INTERNATIONAL BANK INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL RESERVES INVESTING INVESTMENT DECISIONS LEVEL OF DEBT LEVY LIABILITY LINE OF CREDIT LINES OF CREDIT LIQUIDITY LIQUIDITY PROBLEMS LIQUIDITY RISK LOAN LOCAL CURRENCY LOCAL FINANCIAL MARKETS LOCAL INVESTORS LONG-TERM DEBT LOOSE MONETARY POLICY LOSS OF CONFIDENCE MACROECONOMIC CONDITIONS MACROECONOMIC POLICIES MACROECONOMIC POLICY MACROECONOMIC VARIABLES MACROECONOMIC VULNERABILITIES MACROECONOMIC VULNERABILITY MARKET PARTICIPANTS MARKET PRESSURE MARKET STRUCTURE MARKET TURNOVER MATURITY MONETARY FUND MONETARY POLICIES MONETARY POLICY OFFSHORE MARKET OIL PRICES OPEN MARKET OPPORTUNITY COST POLICY RESPONSE PORTFOLIO PORTFOLIO CAPITAL PORTFOLIO CAPITAL INFLOWS PORTFOLIO FLOWS PORTFOLIO INFLOWS PORTFOLIO INVESTMENT PORTFOLIOS PRIVATE CAPITAL PRIVATE CAPITAL FLOWS PRIVATE CAPITAL INFLOWS PRIVATE DEBT PRIVATE INFLOWS PRIVATE INVESTMENT PRIVATE SAVINGS PROPERTY INVESTMENT PUBLIC DEBT PUBLIC INVESTMENT RATE OF DEPRECIATION REAL EFFECTIVE EXCHANGE RATE REAL EXCHANGE RATE REAL EXCHANGE RATES REDEMPTION OPTIONS REMITTANCES RESERVE BANK RESERVE REQUIREMENTS RESERVES RETURN RETURNS SECURITIES SHORT TERM DEBT SHORT-TERM DEBT SHORT-TERM LIABILITIES SHORT-TERM VOLATILITY SLOWDOWN SOLVENCY STANDARD DEVIATION STOCK MARKET STOCK MARKET CAPITALIZATION STOCK MARKET INDEX STOCK MARKET PRICES STOCK MARKETS STOCK PRICES STOCKS SWAP SWAPS TRADE CREDIT TRADING TREASURY TREASURY BILLS TREASURY BONDS TURNOVER TURNOVER RATIO TURNOVER_RATIO VALUATION VALUATION CHANGES VOLATILITY WEIGHTS WITHDRAWAL WITHDRAWAL FACILITY WORLD DEVELOPMENT INDICATORS
Online Access:	http://documents.worldbank.org/curated/en/2014/10/20308181/tapering-tightening-impact-feds-exit-india http://hdl.handle.net/10986/20493

Description
Summary:	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.

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