India pledged on Thursday to take all necessary steps to ensure stability in financial markets as it tried to calm jitters over the U.S. Federal Reserve’s decision to scale down its economic stimulus.
The U.S. central bank said on Wednesday it would buy $65 billion in bonds per month starting in February, down from $75 billion now. It shaved its purchases of U.S. Treasuries and mortgage bonds equally.
The Federal Reserve’s mammoth purchases of long-term assets have flooded emerging markets like India with huge amounts of cheap cash, helping them fund their growth ambitions. But as it scales down its asset purchase programme, investors are pulling out from riskier assets, resulting in a rout in emerging markets.
India, thus far, has avoided the scale of sell-off happening in countries like Argentina, Brazil, South Africa and Turkey. But New Delhi said on Thursday it will remain vigilant.
“As Government has stated earlier, India’s economy is better prepared for the consequences, if any, of the taper,” the finance ministry said in a statement.
“(We) will take whatever steps are necessary to ensure that there is stability in the financial markets.”
Saddled with hefty current account and fiscal deficits, India looked the most vulnerable last summer to the Fed’s decision to wind down its stimulus. The rupee went in a free-fall, losing as much as 20 percent against the dollar before recovering.
The Indian rupee fell on Thursday, tracking weakness in emerging markets after the Fed’s tapering move.
The partially convertible rupee was at 62.79/80 around 9.45 a.m. versus Wednesday’s close of 62.41/42. It had earlier dropped to as low as 62.90.-Reuters