New Delhi: India is better prepared now to deal with the consequences of a mild tapering by the US Federal Reserve than it was earlier this year, finance minister P. Chidambaram said on Thursday.
Markets have already factored in the decisions of the US Federal Reserve, the finance minister said in a statement.
To highlight that the government and the Reserve Bank of India (RBI) are working together, the finance minister said he has spoken to RBI governor Raghuram Rajan on this issue.
The central bank and the government had announced steps earlier this year such as making non-resident Indian deposits more attractive by offering banks a swap window at concessional rates to provide a foreign currency cushion in case of a huge tapering and a withdrawal of foreign funds from India.
These measures also supported the rupee that had depreciated against the dollar, nearing the 70-per-dollar mark against the greenback.
Arvind Mayaram, India’s economic affairs secretary, reckons Asia’s third-largest economy is in a much better shape this time, thanks to the measures taken to bolster the forex reserves and control the current account deficit, to handle the fallout of any decision to reduce the stimulus, reports Reuters.
“So, all these measures taken together I believe would keep the market stable and there is not going to be a very great impact from the taper on the rupee going forward,” he told reporters on the sidelines of a G20 (Group of Twenty) conference in Seoul.
“I would not say no impact, but I would say there would be little impact and whatever impact is there would be short-term impact on the rupee.”
A Bank of America Merrill Lynch report said the Indian rupee could see some volatility in the short run as the dollar benefits from the tapering.
“We expect the Indian rupee to see some volatility in the short run if the markets panic about shrinking G-3 (US, European Union and Japan) liquidity at some stage. After all, import cover, at 7.5 months one-year forward, remains below the 8-10 months needed for the rupee stability,” the report said.
The US Federal Reserve announced a slight reduction in its bond-buying programme. It will now purchase securities of $75 billion per month from January as against the earlier level of $85 billion per month.
The Fed also indicated that it will continue with the low interest rate regime in the near future.