Don't stress the taper PDF Print E-mail
Tuesday, 08 October 2013 00:35
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There are mitigating factors, including Abenomics


Though the immediate danger of the US Fed taper is over, more so given the political gridlock that led to the US government shutdown, its likely impact will be the subject of the Fund-Bank meetings in Washington later this week. Indeed, one of the IMF position papers prepared for the meetings uses the opportunity to market some of the IMF’s non-stigma facilities such as the Flexible Credit Line to help build up strategic buffers to tackle forex outlows of the type India witnessed since May 22 till September when things stabilised a bit—after net outflows (debt and equity) of $550 million between May 22 and May 31, June saw outflows of $7.1 billion, July $3.1 billion and August $2.3 billion; in September, though there were $1.3 billion of outflows on the debt side, equity inflows ensured positive net flows of $733 million. The obvious lesson from looking at even these numbers, and the IMF does more detailed analyses for all countries, is that equity investments have been remarkably stable. A total of $3.7 billion of FII equity flowed out in June to August, but this is very small compared to around $200 billion of FII equity inflows historically into the country. In other words, instead of being focused on just debt, India needs to focus on making the environment more conducive to equity investments—while a rate-cut will help, the real issue lies in making the business environment more receptive to investment and growth.

After concluding, correctly, that there was no option to the unconventional monetary policies if the global economy was to survive the 2008 crisis and that its net impact was positive, the IMF uses bond/equity flow numbers from the EPFR dataset—which adds up to $8 trillion of capital under management—to analyse the impact of various aspects of unconventional monetary policies from QE1 in the US to outright monetary transactions in the EU and even Japan’s Abenomics. Regression results are provided for each country in relation to the phases of the unconventional monetary policy of the US, EU and Japan. Naturally enough, there is a high correlation as far as US policies and Indian bond flows are concerned; surprisingly, the correlations with equity flows is low—contrast the equity outflows with the overall amounts invested, though, and the weak correlation looks less curious. When you look at the impact of all unconventional monetary policies, the impact analysis is even more interesting. On bond flows, the impact of US policy was, to a certain extent, lowered by the positive impact of EU policy. Similarly, while QE1 resulted in an outflow of equity from India, this was more than made up by the EU and Japanese policies. In other words, India needs to worry about getting its overall policy right, even if the US taper has a negative impact—apart from the fact that the taper means US growth is picking up, which is a good thing—this can be made good by easy policies in other countries.


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