We talked to leading economists and fund managers to help you make sense of what is happening in the US and how it could impact emerging economies like India. This is what Madan Sabnavis, Chief Economist of CARE Ratings, had to say:
How will fund flows to emerging economies be affected by the tapering?
US Fed tapering will affect the overall quantum of investible funds from the US to emerging markets. When the QE programme started, funds moved over in large quantities to the emerging markets. Any tapering will remove these excess funds away from emerging markets including India. However, the normal flow of funds which were coming in due to good valuation in recipient countries will continue.
How do you think markets globally and in India particularly react?
A default in the US would mean loss of faith in economy and hence dollar depreciation, flight of funds from US to emerging or euro markets, a fall in growth in US as government spending falls further after shutdown. Interest rates will increase in the US--if funds start selling treasuries there will be excess sale or supply leading to bond prices falling, thus increasing yields and the Fed will defer its tapering in this commotion.
What could that mean for India?
India could see more funds coming in--good for exchange rate and balance of payments. The rupee strengthens as dollar weakens further but exports to be affected as US economy goes into a decline. If the debt default does not happen, which is more likely, then it will be status quo and business as usual.
Will a gradual tapering soothe market nerves?
Yes, as stated earlier, the fear of a withdrawal is more volatile than the actual withdrawal. We see this in all economic variables as markets are run on sentiment and such expectations fuel negative sentiment and the rupee declines thus reinforcing such beliefs.
How does the rupee move with any tapering that might happen?
Based on fundamentals the rupee should be between 58-60. The difference would be attributed to sentiment. Things can get worse due to sentiment when the tapering programme is deferred and there is speculation of when. The range of 63-65 would be the worst case scenario and presently 60-63 can be the expected range until we get clarity on the tapering programme. Now with the shutdown and debt service default fear, the Fed action will be deferred for a while.
What is the threat to CAD if the tapering commences?
CAD will not be affected directly. Tapering affects capital flows and not CAD. It would have only an indirect impact through rupee change and its impact. CAD will be around 4 per cent with an upward bias. Anything below will be very fortuitous. One must remember that the denominator will also be lower this year, thus pushing up this ratio.
This interview follows an earlier story of Wealth Insight.
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