US fed tapering its Impact on Rupee

Subject – Economy

Context – Rupee plunges to 18-month lowa head of US inflation data

Concept –

What is tapering?

Tapering refers to the policy of gradually withdrawing the monetary stimulus by the US Federal Reserve.
The Fed purchased massive Treasuries and mortgage-backed securities since the outbreak of Covid, to help the economy deal with its impact.

What was the impact of taper in 2013?

The phenomenon, popularly known as taper tantrum, disrupted the markets in 2013.
Emerging economies witnessed huge capital outflows and a corresponding rise in inflation.
The policy of quantitative easing was adopted by the Fed during the financial crisis of 2018. As part of it, benchmark interest rate was reduced to virtually zero.
It was a way for the US to continue to provide credit to the economy and further lower borrowing costs for companies and consumers. By buying assets, their price goes up, which lowers their yield or interest rate.

How will it affect consumers?

Benchmark interest rates have remained at near zero levels for better part of the last 13 years.
However, with Fed cutting back on its purchases, there are expectations that interest rates might go up — even if marginally.
The Fed also changed its timetable for interest rate increases to 2022 from 2023. So, the hike may happen sooner than expected.
Eventually, it may become costlier to buy a car, home or even to start a business as the cost of borrowing for mortgages and loans will go up.

What will be the impact on India?

The Indian economy is in a much better position today as compared to the global financial crisis.
Even though the Covid-19 pandemic battered growth in 2020, the economy recovered sharply to register its best ever quarterly growth in gross domestic product (GDP) in the April-June period.
The stock markets have also witnessed a stellar performance ever since its pandemic-induced slump in March 2020.
Investors have gained over Rs 90 lakh crore in the past one year with the market capitalisation of BSE listed companies jumping nearly Rs 100 lakh crore in the same period.
Besides, the Reserve Bank of India (RBI) has also cut its key lending rate to record lows and infused massive liquidity into the banking system to shore up the pandemic-hit economy. It also oversaw the quick rescue of troubled lenders.
India has also accumulated sufficient foreign exchange reserves worth $642.019 billion as of October-end.
So, even if the markets experience some outflows in the short-term, it is unlikely that the impact will be very significant and difficult to recover from — given the strong fundamentals of the economy