Among The Formidable Five

Context: The risk of another tantrum remains significant. But India is well placed to survive with limited damage.

A possible repeat of the ‘taper tantrum’ of 2013: Easy money policies since the 2008 crash and to combat Covid-19 is expected to be reversed, causing sharp global interest rate hikes and, thereby, trillions of hot money to cascade out of emerging markets (EMs) like India, Turkey, South Africa, Brazil and Indonesia (Fragile five).

India better placed to limit the damage: 

• Structural changes from the 2000s: Learning from Asian financial crisis, all EMs had abandoned informal pegs to the dollar, ensured currency flexibility and built up forex reserves to cope with future shocks.
• Structural changes and the rise of China meant EMs today are no longer viewed as highly risky.
• Shift in central bank attitude: Earlier, a debt/GDP ratio > 80% risked economic collapse, today, such notions have disappeared as the US is about to cross 100%, and Japan has crossed 260%, with no ill effects.
• Rise of modern monetary theory: Which says governments can borrow limitlessly in their own currency without causing high inflation. 
• Financial markets no longer panic at rising debt/GDP ratios: Across the world, central banks have printed currency worth trillions of dollars without causing inflation. 
• Comfortable cushion from macro-economic indicators: India’s repo rate is down to 4% from a peak of 9% in 2008.
• Rejuvenated Current account deficit (CAD) position: In 2013, India’s CAD had soared to 4.9% of GDP, now close to zero, and, in some months, India has run a current account surplus.
• Foreign exchange reserves were around $250 billion in 2013, but today are near $600 billion. So, even if $100 billion suddenly flows out in panic.
• Inflation was over 10% in 2013 but is now 4.3%. 
• Price of oil has risen from $60 a barrel to $70 a barrel since early 2020, still way below $110 in 2013.
• With interest rates plummeting since 2013, the cost of servicing debt has moderated considerably.
• Advanced warnings systems: The 2013 tantrum made central banks aware of the importance of clear messaging, giving advance notice of future changes in monetary policy to avoid market panics.

India’s weak links

• Fiscal deficit: Budgeted at 4.6% of GDP this year, as high as in 2013.
• High debt to GDP ratio: A huge Covid induced fiscal deficit has pushed the debt/GDP ratio close to 90%.
• Poor capacity of multilateral organisations: IMF likely to issue another $650 billion of special drawing rights, but it will be distributed in proportion to quota of IMF members, so EMs will get only a small slice.