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Business News/ Market / Mark-to-market/  Is India better prepared for withdrawal of Fed stimulus?
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Is India better prepared for withdrawal of Fed stimulus?

Curbs on gold imports, improving exports, overseas deposits and swaps should ensure markets don't suffer much, at least from external events

Logically, a rise in US treasury yields should be accompanied by a fall in the Sensex as foreign investors pull out their money from riskier assets. But that has clearly not happened, while equities of Indonesia, an economy which shares many characteristics with India, have declined. Photo: MintPremium
Logically, a rise in US treasury yields should be accompanied by a fall in the Sensex as foreign investors pull out their money from riskier assets. But that has clearly not happened, while equities of Indonesia, an economy which shares many characteristics with India, have declined. Photo: Mint

The chart shows that Indian equities are almost at the same level now as 22 May, when former chairman of the US Federal Reserve Ben Bernanke first talked about winding down the American central bank’s stimulus programme. In the interim, despite various see-saws, US 10-year treasury yields have climbed by about 80 basis points. Logically, a rise in US treasury yields should be accompanied by a fall in the Sensex as foreign investors pull out their money from riskier assets. But that has clearly not happened, while equities of Indonesia, an economy which shares many characteristics with India, have declined. A basis point is one-hundredth of a percentage point.

To be sure, foreign investors withdrew money more from bonds rather than equities at the height of taper fears. Thus the sell-off earlier this year might’ve been owing to the impact of rupee depreciation. But with the Indian central bank managing dollar demand and the governor’s assurance that there is no “fundamental reason for volatility in the value of the rupee", that fear has receded a bit.

In any case, the country seems to be better prepared for external shocks now when compared with May. With the curbs on gold imports working and exports also showing gains, this fiscal’s current account deficit is estimated to come at $56 billion, or below 3% of gross domestic product. Some $18 billion has been raised by way of overseas deposits and swaps. These should ensure that the market doesn’t suffer much of a downside, at least from external events.

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Published: 21 Nov 2013, 09:50 PM IST
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