India better prepared to handle Fed's QE tapering: Experts

However, low current account deficit needs to be sustained, say experts, warning against removing the curbs on gold import

Any tapering of its monthly $85-billion bond buying programme by the US Federal Reserve will not have a major impact on the Indian economy, according to economists here.

However, they warned that the government should not withdraw the curbs on gold  import.

“We are better prepared to handle the tapering. This augers well for our economy, as exports might look even better now, with the US being India’s largest trade partner,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The central bank of the US announced on Wednesday that it would cut its bond buying programme by $10 bn a month from January. Nitsure added this was a moderate cut and there’d be no major reaction.

Pronab Sen, chairman of the National Statistical Commission, said India was in a comparatively easier situation than some months earlier. “There has been a sharp reduction in the current account deficit (CAD) but the million dollar question is how sustainable this would be,” he said.

The CAD for the quarter ended September narrowed to 1.2 per cent of gross domestic product, its lowest since 2010, compared with 4.8 per cent in the first quarter of 2013-14.

Sen, former chief statistician to the government, said we needed to keep a very close eye on the CAD and foreign exchange reserves. “We need to be sure that whenever tapering takes place fully, CAD is under control.” He said the forex reserves, $295.7 bn on December 6, were too low.

After US Fed chief Ben Bernanke gave a hint in May of rolling back the stimulus programme, the government and the Reserve Bank of India  took many measures to check the external account, one of these being restrictions on gold import. This helped contain the latter and improved the trade balance.

Economists said one needed to be careful in this regard. “The government might be thinking of re-opening the doors for gold imports, as these have gone down substantially. But, we have to be cautious,” said Madan Sabnavis, chief economist at CARE Ratings.

Curbs in gold import were the major reason for a reduced trade deficit and, hence, the CAD, beside surging exports. For instance, non-oil imports declined 23.7 per cent to $23.9 bn in November, compared to $27.3 bn a year before. Much of this came from an 80.5 per cent fall in import of gold & jewellery, at $1.05 bn against $5.4 bn over the period.

The government raised the import duty on gold thrice this financial year, to 10 per cent.

Sabnavis said the only vulnerability would be that net inflows by foreign institutional investors would be negative but “we will not be affected substantially”.

FII investments have more than halved this  calendar year so far. They have net-pumped in $11.2 bn this calendar year against $29.2 bn in the corresponding period of 2012.