NEW DELHI: India hopes to have a $300-billion war chest ready by the end of the year as a frontline defence against tapering by theUS Federal Reserve, which is now expected to begin sometime early next year.
The finance ministry expects $30 billion to be added to its foreign exchange reserves, currently estimated at $251 billion, by the end of November.
"The effort is to build the forex kitty," said a senior finance ministry official. The government doesn't see any major upheaval from tapering, he said.
Fed Chairman Ben Bernanke's suggestion in May that the US could start pulling back its bond-purchase programme triggered a panic exodus from emerging markets, with India among the worst hit. There's been a recovery since then as overseas investors have returned and Fed has put off a decision on when tapering will start. Meanwhile, the government and RBI have taken a series of steps aimed at strengthening India's defences ahead of the inevitable withdrawal of the stimulus programme.
RBI is expected to respond more quickly than it did last time to check rupee volatility as tapering approaches.
Independent experts also see strong dollar reserves as the best defence against any capital outflow and resultant pressure on the rupee. Total reserves, including gold and balances with IMF, are currently at $281 billion, up from $275 billion at the end of August.
It has since rebounded to around 61 to the dollar because of measures by both the government and RBI and a substantial improvement seen in the current account deficit (CAD). Economists agree the preparation will mean that India will be able to handle the actual winding down of Fed’s unprecedented monetary stimulus better than it did when there was a mere mention of its possibility. “We will be able to manage and there would not be much volatility... India's fundamentals have improved,” said DK Pant, director and head, public finances, India Ratings, the local arm of Fitch Ratings.
The finance ministry expects $30 billion to be added to its foreign exchange reserves, currently estimated at $251 billion, by the end of November.
"The effort is to build the forex kitty," said a senior finance ministry official. The government doesn't see any major upheaval from tapering, he said.
Fed Chairman Ben Bernanke's suggestion in May that the US could start pulling back its bond-purchase programme triggered a panic exodus from emerging markets, with India among the worst hit. There's been a recovery since then as overseas investors have returned and Fed has put off a decision on when tapering will start. Meanwhile, the government and RBI have taken a series of steps aimed at strengthening India's defences ahead of the inevitable withdrawal of the stimulus programme.
RBI is expected to respond more quickly than it did last time to check rupee volatility as tapering approaches.
Independent experts also see strong dollar reserves as the best defence against any capital outflow and resultant pressure on the rupee. Total reserves, including gold and balances with IMF, are currently at $281 billion, up from $275 billion at the end of August.
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“If our debt gets included in one of the global indices, there would be an additional flow of $20 billion just on this count,” said Abheek Barua, chief economist, HDFC Bank, referring to ongoing efforts aimed at getting included in such benchmarks for emerging market debt. “We expect forex reserves to be a little less than $300 billion with an upside,” he said.
Fed deferred the scaling down of its $85-billion-a-month bond buying programme on September 18 until there was stronger evidence of recovery in the world’s largest economy. Most analysts now expect the rollback of bond purchases to begin by early next year after employment numbers last month showed the US economy was gathering pace. The rupee depreciated more than 20% in less than five months toward the end of August, hitting an all-time low of 68.85 to the dollar as foreign investors pulled out funds.It has since rebounded to around 61 to the dollar because of measures by both the government and RBI and a substantial improvement seen in the current account deficit (CAD). Economists agree the preparation will mean that India will be able to handle the actual winding down of Fed’s unprecedented monetary stimulus better than it did when there was a mere mention of its possibility. “We will be able to manage and there would not be much volatility... India's fundamentals have improved,” said DK Pant, director and head, public finances, India Ratings, the local arm of Fitch Ratings.
Tanay Tapas
PGDM 1st
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