About Tapering:
- It is the theoretical reversal of quantitative easing(QE) policies, which are implemented by a central bank and intended to stimulate economic growth.
- Tapering refers specifically to the initial reduction in the purchasing of and accumulation of central bank assets.
- As a result of their dependence on sustained monetary stimulus under QE, the financial markets may experience a downturn in response to tapering; this is known as a “taper tantrum”.
- Tapering is the first step in the process of either winding down—or completely withdrawing from—a monetary stimulus program that has already been executed.
US Federal Reserve(Fed Tapering) used this policy in the aftermath of 2008 Global Financial Crisis and now after Corona peak to reverse the QE stimulus effects gradually.
Potential Effects of tapering- Due to the probable upcoming interest rate hikes in US, the Foreign Portfolio Investors (FPIs) started running out of the Indian Markets and this resulted in Rupee Depreciation.
- In an environment in which capital moves swiftly to whichever destination offers it higher returns, any significant change in the world’s largest economy can have profound effects on other, smaller economies of the world.
