The highly awaited tapering of the US Federal Reserve's monthly $ 85bn bond buying program since September '12 commenced in January '14 in light of the progress made by the country towards maximum employment and improvements in the labor market conditions juxtaposed with recovering growth. Accordingly the Fed decided to gradually trim down the stimulus plan. The bond buying was hence cut by$ 10 bn in January '14 and by a further $ 10 bn in February'14. With the cut of another $ 10 bn announced by the Fed, the easing programme would now be $ 55 per month.
Forward Outlook in the light of the tapering programme
Interest rates are more likely to be driven by domestic considerations with RBI action being the guiding factor.
FII inflows in India are likely to remain buoyant with no major threat otherwise. Forming of a strong and progressive government will work as a catalyst for future foreign inflows. However, once the Fed increases rates, then funds would certainly reconsider options.
Domestic stocks are driven by internal factors of Elections, performance of economy; trade flows, FII movement etc. and the tapering impact would be limited.
Rupee against the USD will remain driven by fundamentals and trade numbers and as long as FII funds are stable, would be unlikely to be affected significantly.
Clearly then, it does appear that India is influenced majorly by domestic factors as opposed to external. Hence, India is expected to remain largely unaffected by the ongoing tapering program of the Fed.
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Concluding Remarks
India has covered some distance from May '13 when a statement of possible tapering by Bernanke, the then Chairperson of the Federal Reserve triggered unrest in the country to today when even though the tapering program enters its third month, the economy is resilient. The threat of tapering was more potent than the actual implementation. It can also be argued, that the Government and RBI prepared the economy for the eventual tapering.
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