Why US Federal Reserve taper worries India no more .

In May, when the US Federal Reserve chairman first referred to the withdrawal of stimulus that was pumping in $85 billion into the economy every month, markets panicked around the world. The impact on India was especially severe. Spooked by talk of an unsustainable current account deficit, there was a speculative attack on the rupee, probably originating in overseas markets.

The rupee shed 50% of its value in a few weeks. Equity markets also tanked in sympathy, as a falling rupee drove dollar returns down for foreign institutional investors (FIIs). June, July and August became the only three months in calendar 2013 when FIIs sold more stock than they bought.

Yet, on Friday, two days after Ben Bernanke actually implemented the taper, by announcing that the US government would pump in $10 billion less into the economy every month, Indian markets rallied. On Friday, the benchmark Sensex closed with a gain of 371 points, up nearly 2% reflecting investor optimism. There are real reasons why markets and investors have shrugged off the loss of global liquidity that the tapering of stimulus would bring.

First, the rupee's fall turned into a mixed blessing: it drove out what were inessential imports, chief among them being gold. This helped narrow the current account deficit, which helped reassure policymakers and economists. Second, the nature of the taper, gradually withdrawing $10 billion every month, reassured investors who were earlier panicky at the prospect of the cash spigot being shut off all at once. Three, the economy today looks in far better health than it did in summer.

The main worry for the government is controlling food price inflation. Seasonal factors, including a glut in the market for some vegetables, could help prices retreat. The government must implement reforms to free the farm produce market from the clutches of predatory traders and middlemen. On Thursday, finance minister Palaniappan Chidambaram was cautiously optimistic when he said that the economy is ready for the taper. A day later, with markets taking him at his word, he can afford a smile.

Source : economictimes.indiatimes.com