The world, and India, are better prepared this time
A few months ago, when US Fed chairman Ben Bernanke spoke of the possibility of a taper, even while promising to keep short-end interest rates very low, global markets tumbled and, in India, foreign investors withdrew $7.1 billion in one month—around $5.4 billion was from the debt markets and the rest from equity markets—to invest back in the safety of developed country markets. The anytime-now taper fear saw withdrawals continue, albeit at a lower pace, and another $5.4 billion was withdrawn over the next two months, taking the rupee tumbling all the way down to a lifetime low of 68.825 to the dollar in late-August. It didn’t help that the current account deficit was looking like it was going to cross 6% of GDP for the year, and speculators were taking all manner of positions against the rupee—no matter how outlandish the number, 70 or 75, it got credibility.
That was then. Now, things look very different. For one, with the US second quarter growth being revised up dramatically to 3.6%—from 2.8% earlier—and the composite European PMI up to a 30-month high at 52.1 in December, the global economy looks a lot stronger. At 1.1 million, private housing starts in November in the US were 23% above those in October and 30% higher than those a year ago; at over 200,000 in November, fresh jobs creation was much higher than September’s 175,000. Most important, with a budget agreement between the Republicans and the Democrats, the chances of another US shutdown look remote—chances are this played a very important role in the Fed’s taper decision. Not surprising then that, this time around, there were no stock market crashes across the world, indeed the Dow rose 1.84%, S&P 500 1.66%, Nasdaq 1.15% and the FTSE 0.90%. Across Asia, however, apart from Tokyo which rose 1.01%, other markets fell—the Sensex fell 0.73%—in anticipation of investors once again pulling out funds.
If stock markets in India didn’t completely tank, the reason is that despite the economic gloom, certain parameters look decidedly better. For one, with Q2 CAD at a mere 1.2% as compared to Q1’s 4.9%, the year’s CAD is more likely to be in the 2.7% range, a number that is easily financed. From a time when it looked like India would rapidly run out of dollars and not be able to finance its short-term debt renewals, RBI’s swap scheme for both NRI inflows as well as banking capital has netted $34 billion—as a result, the rupee has bounced back to levels of 61.5-62. While analysts don’t see a big sell-off of the June/July type when the market was caught off guard by the Fed, the other big positive is RBI’s ability to withdraw, in a full year, $160 billion of dollar-demand from oil PSUs—and since Governor Raghuram Rajan has said the oil swaps can be, if required, settled in rupees, this means RBI can repeat this should there be pressure on the rupee. In other words, expect some short-term volatility but not much more.