Likely to slow down outflow of funds from India.
By R. Chandrasekaran
CHENNAI: The U.S. Federal Reserve Chairman Ben Bernanke’s comments that it will not taper the current bond buying program of $85 billion a month has come as a big relief to not only India but also to other emerging economies since this is expected to restrict the outflow of USD from these nations.
Bernanke also said that inflation below its 2 percent goal will ignite danger to its economy and sees deflation threat in the medium term. He was speaking at the Federal Open Market Committee (FOMC) on Wednesday and this will provide some relief to Indian policy makers, who were glued to the U.S. central bank’s comments.
These two comments are undoubtedly a blessing in disguise for India. The Indian currency is battered currently because of the expectations of an increase in bond yield in the largest economy of the world. This has triggered a major outflow of funds from India.
For instance, in June alone foreign institutional investors have taken away $7.5 billion from the Indian capital market, which include money invested in the debt market. Similarly, in July the FIIs have withdrawn more than $2 billion from the debt market and over $1 billion from the equity markets until last Friday. It could have been worse but for the FIIs subscribing to the government’s bond in July thereby limiting the net outflows.
FIIs had to invest its money where the bond yield is higher and India was one among the emerging nations to attract funds inflow. They were the aggressive buyers during the initial five months of the current calendar year generating approximately $4.5 billion.
Ever since the U.S. Federal Reserve chairman said that it will start reducing the bond buying program of $85 billion and finally stopping it by the middle of next year, FIIs were in withdrawing spree since investing in U.S. bonds offered more safety, especially after Standard & Poor’s upgraded it recently and the chances of downgrade looked unlikely at least for the next two years.
As a result of the possible easy money policy coming to a close, the Indian currency dropped about 13 percent since April to reach a lifetime low of 61.21 on July 8 as the outflows were unstoppable and inflows were hardly enough to arrest the significant slide.
Though the Indian government and the Reserve Bank of India have a taken number of initiatives, it could only prove to be temporary measures. Given the importance of holding back the FIIs investments, the Fed’s comment will likely limit their withdrawal in the coming weeks, thereby helping the Indian government to come up with fresh measures to ensure stability in the Indian currency.