No taper tantrum (On US Fed reserve policies)

Source: Business Standard

What is the news?

The US Fed Reserve is considering reducing the pace of its asset purchase. As per Fed’s Chairman, the economy had evolved as expected, and it could be appropriate to start reducing asset purchase this year.

But, it’s not clear at this stage as to when the Fed will start tapering and at what pace.

• Tapering is the gradual reduction in the monthly purchase of assets by the Federal Reserve. It is the process of slowing down Quantitative Easing (QE).

Concerns for India

• The announcement of tapering in 2013 resulted in significant volatility, which led to a near currency crisis in India. A slower normalisation will give emerging markets more time to adjust. Some emerging market economies have started normalisation despite a slower economic recovery.
• To be sure, India is in a much better position than in 2013. Unlike then, the current account is in far better shape and India reported a surplus last fiscal year.
• It has also accumulated large foreign exchange reserves, which will help the Reserve Bank of India (RBI) manage volatility in the currency market effectively.
• But it still has two big problems, (i) sustained higher inflation, (ii) large general government Budget deficit with high public debt.

Way forward

• As the world starts returning to normal, Indian policymakers will need to address inflation and a budget deficit to preserve financial stability.
• The government must also work on a medium-term fiscal plan.