India in a much better position to handle taper now than 2013: Former RBI governor D Subbarao

India is better positioned now to face any tapering of bond purchases by the Federal Reserve leading to a financial market gyrations than it was in 2013 when he was the governor of the Reserve Bank of India, said D Subbarao.

Besides a much better current account and fiscal deficit position now, the country has a stronger armoury of forex reserves to tackle volatility in the event of

outflows. Also, the central bank may not need any monetary policy tool if US normalises liquidity as outflows could be handled through currency market interventions.

“Change in monetary policy stances, in conjunction with a likely tapering of bond purchases in major advanced economies later this year, is beginning to strain the international financial markets with a sharp rise in bond yields in major AEs and EMEs after remaining range-bound in August” The Reserve Bank said in its monetary policy statement last week. ” The US dollar has strengthened sharply, while the EME currencies have weakened since early-September with capital outflows in recent weeks”.

“Measures that EBI would take would be quite in 2021 from 2013. We were a part of fragile five in 2013, we are not in that position now” said Subbarao at an event organised by ratings firm Crisil. ” The current account deficit was high then. Now it is low and fully financed by stable flows. There is no pressure on the rupee” The current account deficit had touched its one of the worst levels of 4.8 per cent of GDP in 2013, while ending in a modest surplus of 0.9 per cent of GDP in March 2021.

Though fiscal deficit is high now, it is not as much of a concern. ” So we are protected from 2013 like situation” he said.

While the huge foreign exchange reserves cannot protect the country from shocks, it would help in keeping order. ” If there are outflows leading to volatility, then the Reserve Bank may enter the forex market to contain the volatility. RBI may not use any monetary policy instruments ” Subbarao said. India added over $100 billion to its reserves in FY’2021 and still growing in FY’22 so far and are at $ 637.5 billion more than double the level in 2013 ( $292 billion) when reserves depleted despite measures to attract flows.



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