Unlike 2013, India is now well placed with plenty of policy room and tools to “manoeuvre” the impact of monetary policy tightening that several major central banks have started to undertake to drain the sea of liquidity in the financial system amid inflation concerns, the Economic Survey for 2021-22 said on Monday.

The ramifications of these global monetary tightening is expected to be limited on India’s external sector given that the country has strengthened its economic and financial position since 2013, when the earlier taper episode rattled Indian financial markets, according to the Survey.

“While acknowledging India’s transformation from being among the Fragile Five countries in the wake of the earlier episode (2013 US Fed induced taper tantrum) 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 as the process of normalisation of monetary policy by systematically important central banks takes hold”, the Survey highlighted.

This is significant as globally heightened level of inflation has now forced major central banks across the world to start tightening the monetary policy to drain liquidity that supported asset values. This has led to funds flowing out of emerging markets, tightening financial conditions. Even global equities had taken a wild ride in recent weeks, amid concerns about inflation and geopolitical risks.

The Economic Survey for 2021-22 has highlighted that due to accretion of large foreign exchange reserves in recent months, vulnerability indicators relating to reserves such as reserves to total external debt, reserves to short-term debt (residual maturity), reserve cover of imports, etc., have shown marked improvement in first half of 2021-22 vis-à-vis FY 2013-2014, the taper- tantrum year. 

Since the taper episode of 2013, India’s salient external sector sustainability indicators improved, the Survey noted. For instance, the conventional metric of import cover in terms of number of months of imports is more than double since the episode of taper tantrum, it added.

The external debt to GDP ratio has also declined since the said 2013 taper tantrum episode. Besides, India witnessed a current account surplus of 0.9 per cent Q1 of 2021-22 on top of similar surplus in 2020-21 after a gap of 17 years. On the other hand, India experienced the highest ever current account deficit of 4.8 per cent of GDP in 2012-13 on the back of an equally large deficit of 4.3 per cent during the previous year (2011-12), it highlighted.

Portfolio outflows

The Survey has highlighted that the Indian economy has exhibited greater resilience so far to the current episode of taper. In the immediate aftermath of the taper tantrum in 2013, India experienced portfolio outflows aggregating to ₹79,375 crore from capital markets, including ₹19,165 crore from equity markets and ₹60,210 crore from debt markets during May 23-August 30, 2013. The latest announcement of reduction in asset purchases on November 3, 2021 by the US Fed had relatively muted impact on portfolio flows.

The total portfolio outflows amounted to ₹34,178 crore, comprising ₹29,168 crore from equity markets and ₹5,010 crore from debt markets during the period November- January 20, 2022.

It maybe recalled that in response to the pandemic, since June 2020, the US Fed had been buying $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month.

In late July 2021, the Fed signalled that it would start reducing the volume of its bond purchases later in the year. On November 3, 2021, the Federal Open Market Committee unanimously voted to scale back its asset purchases.