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- Mrunal - http://mrunal.org -
Prologue
What is Fed tapering
Why is it called Fed Tapering?
How can Fed Tapering affect India?
Worst case scenario [WCS] by Fed Tapering
1. WCS1: Hot money gone / Flight of Capital
2. WCS2: Weaker Rupee= bigger CAD + bigger inflation
3. WCS3: Exports may not increase
1. Dushmani 4DEVYANI= less EXPORTs
2. Special 301 report & Priority status= less EXPORTs
6. BoP crisis: How can that happen?
7. Can Fed Tapering really cause BoP crisis?
Prologue
1. you already know about Quantitative easing and its impact on Indian economy. Click
me. So far we know that:
2. in this article, well learn the basics of Fed tapering and its (possible) negative impacts
on Indian Economy.
3. in the next article= Steps taken by RBI +Government to immunize Indian economy
against the negative impacts of Fed Tapering (currency swap agreements etc.) click me
http://mrunal.org/2014/03/fed-taperingpart1-2-meaning-fed-tapering-negative-impact-indian-economy-worst-case-scenarios-balance-payment-cri
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So, he starts closing dam-gates one after another. Result? water supply (dollar) reduced.
This is fed tapering. Observe
Time
Dec 2013
Jan 2014
Feb 2014
March 2014
At this rate, canal doors should completely shut down @October 2014. (Because now the new
Chairman Jenet Yellen is reducing the water supply (dollars) by 10 billion USD per month.)
In above graph, observe that the Width of canal / graph is decreasing constantly. (in
other words, Dollar supply is decreasing).
Tapering is a mechanical term, to describe such constant decrease in width.
And since this is being done by US Federal Reserve, so we call it Fed Tapering.
Formal definition: Fed tapering is the gradual reduction in the bond buying program
of the US Federal Reserves.
http://mrunal.org/2014/03/fed-taperingpart1-2-meaning-fed-tapering-negative-impact-indian-economy-worst-case-scenarios-balance-payment-cri
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Quant. Easing
HIGH
Increase
09=50
10=44
Greece/Eurozone crisis.
Since QE = increase dollar supply and Fed tapering= decrease in dollar supply, so by
common sense, every effect should become reverse, right?
Indian
point of
view
Dollar
Supply
FDI-FII ExchangeRate
Export
HIGH
Increase
2009: $1=50
rupees.
2010: $1=44
rupees.
Fed
Tapering
Medium Decrease
March13: $1=55
May 13(rumor of
Not as high as expected. (more
Fed tapering
given in later paragraphs)
starts)
Sep 13: $1=66
Rs.
http://mrunal.org/2014/03/fed-taperingpart1-2-meaning-fed-tapering-negative-impact-indian-economy-worst-case-scenarios-balance-payment-cri
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Lets not waste more time in ball by ball commentary and jump directly to:
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Decreased because of fed tapering. (recall those dam gates are being
closed one by one)
Increased because FII is exiting from Indian market.
Onion (dollar) gets more expensive. $1=65=>$1=70.. In other words,
dollar strengthens and rupee weakens.
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Now, American business lobbyists are using this negative-sentiment to get American
regulatory bodies to teach us a lesson and get tit-for-tat. Observe:
US
body
USFAA
When Indian flights go to USA, their officers will do more safety checking
= more time will be wasted, inconvenience to Desi passengers.
Jet airways share prices fell down.
Domino effect: Singapores aviation authority also started inspecting Indian
aircrafts.
The aviation regulators of EU, Japan, UAE will also reduce our rating.
Consequences: Indian aviation will not bring *that much* dollars as expected.
If we get negative review in Special 301 report = USTR can classify India as Priority
foreign country
Priority tag sounds VIP right? Nope infact it is bad news.
Because USTR has powers to penalize priority countries e.g they can to impose
higher duty/taxes and quota restrictions on Indian exports to USA. (and WTO may not
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In each of them, further weve incoming money (credit) and outgoing money (Debit).
For the sake of understanding, lets observe a BoP data from 2012-13 (USD million dollars).
Credit +
300000
150000
10000
68000
528000
Debit 500000
80000
30000
4000
614000
Net
-200000
+70000
-20000
+64000
-88,000
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215000
175000
Borrowing
150000
Bank Capital Non-resident bank accounts 83000
investment
FDI
FII
Government +private
170000
150000
120000
67000
45000
25000
30000
16000
+89300
In otherwords, we had Current account surplus of ~90 billion $ in 2012-13. Now lets do total
2012-13
Current
Capital
Error Omission
Overall
Million USD
-88000
+89300
+2689
+4000 (Approx.)
What happens to this overall surplus 4 billion USD? Three things can happen
Then +4 billion USD = more supply of onions (dollarS) in the Desi
1. Do nothing. Forex market. This will change in rupee-dollar exchange rate, because
of laws of supply n demand.
2. Give them
to IMF
3. RBI should
put them in
Same as above.
forex
reserve.
We took the third option. Observe.
2012-13
A.Current account
B.Capital account
C.Error Omission
Overall (from A+B+C)
Overall surplus sent to RBIs forex reserve
Balance of Payment
Million USD
-88000
89300
2689
+4000 (Approx.)
-4000
0
Meaning, as long as Capital account has more money than Current account, well have
surplus.
But what happens IF we dont have surplus (i.e. capital account has less money than current
account)?
It happened in 1991s BoP crisis. Observe the data
1991 (Apr-Sep)
Current
Capital
Overall Balance
Million $$
-6634
+4808
-1826
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In above table, We dont have any surplus! See we had deficit of ~2 billion USD.
(=pothole is created).
IF we want to get final Balance of payment ZERO then someone (Rajan, Mohan,
Chindu, Rajesh Khanna or Shakti Kapoor) must pour in +2 billion US dollars to fillup
this pothole.
But in the 1991, RBI did not have sufficient forex reserve to fillup this pothole with
dollars. (RBI had barely ~730 million USD, while pothole was ~2 billion).
If this pothole is not filled up, then what will happen?
1. Extreme shortage of onions (dollars) in Indian forex market. => price of 1 onion(dollar)
will go as high as 500 Rupees or even more!
2. Then, We wont have dollars to pay for our crude oil imports= economy collapses.
This is called Balance of Payment (BoP) crisis. Solution? We had to pledge ~65 tonnes of
gold to IMF to borrow ~2.3 billion USD. That money was used to fillup the BoP pothole. We
also initiated LPG reforms, to ensure that in future we have sufficient capital surplus so BoP
crisis doesnt happen again. Enough flashback of 91, Back to original moving:
Precondition
met?
Yes, may be
Hell NO!
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