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India reassures Davos on impact of US ‘tapering’

Published on 22/01/2014

India's finance minister Wednesday told delegates at the World Economic Forum at Davos his country had taken steps to protect against the impact of US monetary policy that many fear will cripple emerging market economies.

Speaking at the opening session of the annual gathering of the global elite, P. Chidambaram said his country’s economy was due to grow by six percent in the financial year 2014 to 2015 and would “step-by-step” approach its potential growth rate of eight percent.

Chidambaram acknowledged he was “concerned” in May when the US central bank, the Federal Reserve, suggested it would gradually wind down — or taper — its $85 billion (63 billion euros) a month stimulus package.

This sparked instability in emerging markets, as much of the cash created by the Fed was parked there and investors worried this would be quickly withdrawn when the liquidity taps were turned off.

Developing countries saw huge inflows of capital when the US started the scheme in September 2012.

But the minister said: “Now I think we have done a lot of preparatory work. There will be some consequences in developing and emerging economies but I think we are better prepared for the taper than when we were surprised in May.”

“Fiscal consolidation has taken place, there’s more FDI flowing into India. We’ve added to our reserves, the rupee is stable and a number of other measures have been taken to bring stability into the capital market,” he added.

India’s economy is growing at a decade low rate of five percent — a far cry from near-double digit expansion during the nation’s boom times — due in part to high interest rates that have slowed investment and spending.

“It’s accepted all round that the Indian economy has stabilised at five percent and that we are poised to grow back, step by step to the potential eight percent growth rate,” the minister said.

“The financial year 2013-2014, we will be only five percent but financial year 2014-2015 (from March) we will cross six percent.”