NEW DELHI: Looking to calm any market jitters after the US central bank on Wednesday decided on another $10-billion cut in bond purchases, the finance ministry said India is well prepared to withstand fallout from the decision.
The ministry said government and the Reserve Bank of India( RBI) were “vigilant” and will take all steps to ensure financial stability. “India’s economy is better prepared for the consequences, if any, of the taper. We have added to ourforeign exchange reserves which stand at $295 billion,” the ministry said in a statement on Thursday.
“However, both the Government of India and the Reserve Bank of India will continue to remain vigilant and will take whatever steps are necessary to ensure that there is stability in the financial markets.”
The US Federal Reserve has decided to scale down its monthly bond purchases to $65 billion from $75 billion per month earlier. Market behaviour thus far suggests that there isn’t any panic selling taking place.
The BSE Sensex closed 149 points lower, recovering sharply from an intra-day fall of 255 points. The rupee fell 15 paise to close at 62.57 to the dollar. “This decision was expected and should not in anyway surprise or affect the Indian markets.
However, it may be noted that $65 billion is not a small sum and will continue to infuse a large amount ofliquidity into the world markets,” the statement added. Economic affairs secretary Arvind Mayaram told reporters that the country was in good shape to withstand negative impact.
“Our fundamentals are very strong. Look at the currencies which are adversely affected; Argentina is quoted quite significantly. Argentinean reserves are around $29 billion. Argentinean CAD (current account deficit) is extremely high. India’s CAD is going to be less than $50 billion or less than 2.5 per cent of GDP,” he said.
Mayaram said the government will meet the fiscal deficit target of 4.8 per cent of GDP in the current fiscal and added that the country did not have any liquidity issues. “They (US Fed) have scaled it down from $75 billion to $65 billion; $65 billion is also a significant sum. Therefore, there will be adequate liquidity in global economy. There is not going to be a sudden contraction, so there should not be undue worry,” he said.
The ministry said foreign direct investment and portfolio flows into the country remained strong and there had been an accretion to foreign exchange reserves, which stood at $295 billion. “There should be no undue concern over external factors,” it said. CAD widened to a record $88.2 billion or 4.8 per cent of GDP in the last fiscal. The statement said the Federal Reserve has not announced a sequential taper and has made it clear that “asset purchases are not on a pre-set course” and that they will take “further measured steps at future meetings.”
The Fed had first announced in May last year that it will taper bond purchases, roiling markets globally, with the rupee hitting record lows. However, it later postponed a decision on the issue.