India’s resilience - Can the country endure taper tantrum 2.0?

November 2021

The country’s outlook is positive, but policymakers have to do more to withstand risks.

The Federal Reserve announced that it will commence the long-awaited tapering of asset purchases by the end of November. This much-anticipated move gives many investors a sense of déjà vu, bringing back memories of the 2013 ‘taper tantrum’. Emerging markets with high debt could witness a reversal of capital flows as investors seek safer havens during market volatility. This can create greater risk and sets the stage for financial disruption.

The question then is, will history repeat itself, or is India’s economy fundamentally strong enough to deal with the uncertainty associated with the Fed’s actual tapering?

Past experiences suggest that the extent of vulnerability varies across emerging economies depending on investors’ risk perception. That, in turn, is influenced by nations’ relative economic performances and fundamentals. During 2013, the economies that belonged to the weaker end of the performance spectrum, including India, were punished the most by investors. But this time, it is different!

In our latest economic report, titled, “India’s resilience: Can the country endure taper tantrum 2.0?”, we compared India’s economic parameters with its peer emerging nations and found that India’s fundamentals are now relatively stronger. The influx of foreign capital and its impact on assets pricing has been recognised by policymakers, and they are vigilant

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