India vulnerable in case 'taper tantrum 2' plays out in 2015

The vulnerability stems from India's external situation is not as strong as that of some other emerging markets

The mere mention of cutting back the quantitative easing programme led to a massive bloodbath in financial markets across the globe last year. But this year's been different because the markets remained calm even after the Federal Reserve's quanto easing ended officially in October. But the risks persist, given that the US interest rate cycle is set to turn. The risk of a flight of capital en masse like 2013 appears slim, but India continues to be vulnerable, given that its external situation is not as strong as that of some other emerging markets.

According to DBS Group Research, a tantrum is unlikely to play out in 2015 as markets have fully anticipated a mid-2015 Fed hike for more than a year. Even if hikes do come in mid-2015, markets would have completely anticipated the event for 18 months. However, volatility cannot be ruled out and from this point of view, India and Indonesia appear to be most vulnerable.

A major reason why some of the Asian countries may not be impacted by a turn in the US interest cycle is because of their reserves. Singapore has reserves of close to 100 per cent of GDP so also does Taiwan, which has reserves up to 83% of GDP. India and Indonesia hold the least foreign reserves in Asia, with ratios of 16% and 11% respectively, says DDS Research. And the position looks much worse, when reserves are seen relative to external debt. In case, there is a flight of capital, India could be in for a shock.