The postponement of the Fed's quantitative easing programme has come as a tailwind for emerging markets like India and their currencies. It has provided the country time to take positive policy action to mitigate its external vulnerability. On the positive side, India's CAD is slated to narrow substantially aided by export growth and a compression in import demand, led by curbs on gold import.
There is now a higher probability that the CAD for FY14 would moderate much below the government’s estimate of $70 billion. The risks surrounding the financing of CAD have also materially subsided. The perception of risk has altered owing to: the improvement in the quantum of the deficit; continued global liquidity; measures taken by the government to augment capital flows by liberalizing FDI and FII norms; and the RBI's steps to attract debt and NRI deposit inflows in the economy.
On the global front markets are slightly unnerved by the partial government shutdown and the issue of raising the debt ceiling, in the United States. The political brinkmanship between the Republicans and Democrats and their failure to reach a compromise on these issues is making investors jittery and risk-averse in the near-term. But eventually, I believe that despite their differences, policymakers would take mature decisions and through negotiations avert any catastrophic impact on global financial markets and economy. Earlier too, policymakers in the US had clinched last-minute deals on contentious issues such as raising the debt ceiling during August 2011 and the sequester issue during March 2013.
As for the monetary stimulus, a gradual withdrawal of the Fed’s bond purchase programme appears inevitable in the next three-six months. In this regard too markets appear to be better prepared now. The Indian economy seems much more resilient now to deal with the ebbing global liquidity as compared to May 2013 when a Fed indication of tapering led to a rout in the Indian forex market and volatility in the equity market. The good news is that policymakers are focusing on correcting imbalances and bringing about a sustainable level on current and fiscal deficits to restore macroeconomic stability.
The recent positives have resulted in FIIs pouring $2 billion in India's equity markets since September 2013 after three straight months of net FII equity outflows. Notwithstanding the liquidity situation or the current macro situation, I believe the Indian economy would continue to attract strong capital inflows because it is a growth-oriented market