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Tackling Trump Tantrum

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Current State of Indian Markets and Historical Context

Since October 2024, Indian markets have experienced a correction phase:

  • The exchange rate has depreciated by 4%.
  • Reserves have decreased by $65 billion, constituting 9% of the stock.
  • Foreign Institutional Investors (FIIs) have withdrawn nearly $23 billion from equity and debt markets.

Historical Episodes of Market Sell-Offs

These market corrections are not unique to India and have occurred frequently over the past decade:

  • 2013: Initiated by the US Federal Reserve's announcement to reverse its monetary policy, leading to the "taper tantrum."
  • 2016: Triggered by the election of Donald Trump as US President.
  • 2018: Due to escalating US-China trade tariffs and tensions.
  • 2020: Onset of the COVID-19 pandemic.
  • 2022: Outbreak of the Ukraine-Russia war.
  • 2024: Fed's policy rate adjustments and Trump's trade policies.

Impact on India

India has been one of the most affected economies during these sell-offs:

  • 2013: Exchange rate depreciated by 25%, reserves declined by 6%, equity markets fell by 9%.
  • 2018: Exchange rate declined by 15%, reserves fell by 8%, equity markets decreased by 3%.
  • 2022: Exchange rate depreciated by 10%, reserves dropped by 16%, equity markets fell by 13%.

Characteristics and Resilience

These episodes are characterized by:

  • Short-lived impacts, usually lasting a few months.
  • Not causing major economic slowdowns due to robust policy frameworks.
  • Resilience of domestic financial sectors.

Response Strategies

  • Countries leverage exchange rate flexibility, forex reserves, and credible monetary policies.
  • No drastic measures, such as IMF assistance, are typically necessary.

Future Preparedness for India

Ex Ante Measures

  • Encourage stable, long-term capital inflows (e.g., FDI).
  • Rebuild reserves buffer when conditions allow.
  • Allow exchange rate movements to prevent excessive volatility.

Ex Post Measures

  • Calibrate exchange rate depreciation and use reserves judiciously.
  • Reassert commitment to reforms and macroeconomic stability.
  • Avoid policy missteps, such as new capital controls.
  • Communicate clearly with market participants.
  • Consider renewing swap lines with specific countries and schemes for diaspora funding.

In summary, as a large emerging market, India must remain vigilant, prudent, and committed to reforms and growth to mitigate the impact of such economic shocks.

  • Tags :
  • Current State of Indian Markets
  • Ukraine-Russia war
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