The combination of high foreign exchange reserves, sustained foreign direct investment and rising export earnings will provide a good buffer against any liquidity tapering/monetary policy normalisation by systemically important central banks — including the Fed — in FY23, according to the Economic Survey for 2021-22.

The Survey noted that a sizeable accretion in reserves led to an improvement in external vulnerability indicators such as foreign exchange reserves to total external debt, short-term debt to foreign exchange reserves, among others.

It emphasised that India’s external sector is resilient to face any unwinding of the global liquidity arising out of the likelihood of faster normalisation of monetary policy by systemically important central banks, including the Fed, in response to elevated inflationary pressures.

“In recent months, scaling back of pandemic-related stimulus programme amidst persistent inflationary pressures in advanced economies, particularly the US, have reignited some fears of taper tantrum.

“However, India’s external sector — well supported by strong exports, capital inflows, low CAD and external financing requirements and high foreign exchange reserves, with various external vulnerability indicators well within manageable limits — is far better prepared this time to face any external shocks arising out of tightening of the monetary policy stance by the advanced economies in coming months,” said the Survey.

It underscored that India’s salient external sector sustainability indicators are strong and much improved as compared to what they were during the global financial crisis or taper episode of 2013.

For instance, import cover and foreign exchange reserves are more than double now.

Referring to a November 2021 NCAER working paper, the Survey said that evidently, 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 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.

“While acknowledging India’s transformation from being among the Fragile Five countries in the wake of the earlier episode to the 4th 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 said.