Don’t worry, we’re prepared, says FM

Tags: News
With the foreign exchange reserves bolstered and the current account deficit reined in, finance minister P Chidambaram said on Thursday that India was better prepared now to deal with the US Federal Reserve’s $10 billion monthly cut in the monetary stimulus beginning next month.

The US Fed announced on Wednesday that it would reduce the monthly bond purchases to $75 billion from the current $85 billion from January.

India’s preparedness reflected in the fact that the rupee fell very marginally after the Fed announcement. Earlier in May, after just a hint from the Fed chairman that it was considering a tapering of the stimulus had sent the rupee crashing.

“We are better prepared than in May to deal with the consequences, if any,” Chidambaram said in a statement after having spoken to RBI governor Raghuram Rajan following the US Fed announcement.

“The markets had already factored in the Fed’s decisions and, therefore, are not likely to be surprised by these moderate changes,” the minister said, adding, “I think the consequence should not be large.”

In yet another move to provide the much-needed foreign exchange cushion to keep the Indian currency stable, India has increased the quantum of bilateral currency swap arrangement with Japan to $50 billion from $15 billion.

“We have to wait to see what they (the US) do with the interest rates. The Fed says interest rates will continue to be kept low…

Over a period of time the rupee was stable and we expect it to remain stable,” Chidambaram said.

“The US tapering was a mild reduction in bond purchases and the Fed did not announce any sequential reduction,” he added.

The Fed said it would continue its purchases of treasury and agency mortgaged-backed securities and employ its other policy tools as appropriate, until the outlook for the labour market improves substantially in the context of price stability.

The RBI has removed most of its emergency measures imposed to arrest the rupee slide earlier this year.

“The Fed’s announcement finally puts an end to speculation about the timing of the tapering. India is now definitely in a better position to manage its balance of payments as the government and RBI have taken effective steps to build forex reserves and render stability to the foreign exchange market,” Ficci president Naina Lal Kidwai said. She, however, cautioned, “We cannot disregard the possibility of market turbulence due to FII action as seen earlier this year. The need for strengthening our domestic financial institutions has to be re-emphasised. The capital market has to be deepened and made more efficient to attract long-term investments and reduce the risk of volatility in capital flows.”

Analysts, however, say the prospect of heavy selling of Indian assets by FIIs is less likely as most of the yield-chasing hot money that entered the country. On Wednesday RBI kept rates on hold but promised to act if the tapering caused the rupee to plunge again.

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