I. Introduction
The concept of ‘taper tantrum’ first came into public consciousness when the US Federal Bank decided to taper its treasuries or asset policies in 2013. The entire world economy faced its consequences and some countries are still struggling to overcome its impact on the native stock market economy.
Definition of the taper tantrum
Taper tantrum refers to the market volatility that the global market suffered from when the US Federal Bank decided to taper its quantitative easing program. In other words, a taper tantrum is a condition when an economy is going through stress and the government thinks there is a crunch of liquidity.
Context in the Indian economy
In India, a taper tantrum unfolded when the US Federal Reserve declared a slowdown of its quantitative easing process in May 2013. This has raised a common fear among native investors of increasing interest rates and the beginning of an unsupportive economy. They also feared that the money would be pulled out of the emerging economic market of India.
Read More: India’s GDP: A comprehensive overview of the world’s fifth-largest economy
II. Historical background
When the Central Bank buys pre-determined stocks or bonds and other securities of the government with the aim to flush the economy with cash. This process is called quantitative easing. Tapering refers to banking strategies where the central banks slowly wind up to a quantitative easing process.
Origins of the term
In the Oxford English Dictionary and Middle English, ‘taper’ refers to a candle or a wick of a lamp. On the other hand, in US English ‘taper’ means gradually narrowing down. While ‘tantrum’ refers to an unstable condition. Finance journalists first used both terms together to mean slowing down the process of QE. This effort of the Central Banks tends to crumble the global market economy.
Previous instances globally
Before learning about the taper tantrum and its effects in India, it is important to learn about previous global instances of this phenomenon. The taper tantrum first came into global knowledge with the 2008 financial crisis, which caused an extended recession and witnessed panic-associated selling of securities and bonds.
In such conditions, the US Federal Government showed a quick response and initiated the bulk purchase of government bonds and securities. They also took other quantitative easing measures to lower lending rates and increase the liquidity of the economy.
From 2008–2015 the US economy showed signs of healing. By 2013 the Fed indicated a slowing in the QE process that spread havoc in both the American and global economy.
III. Taper tantrum in India
The tapering of US Federal Bank policies created a global impact. This didn’t spear the Indian investment market and caused a lot of fear related to selling out and economic disturbance.
Key events and timeline
Here are some key events and timelines in India after the tapering began in the US in 2013:
After a first wave of foreign investment that drove a market boom, the 2013 Taper Tantrum represented a major upheaval in India’s financial structure. When the United States signalled a slowdown in its bond-buying program, investors panicked, and the situation worsened.
Foreign money left India in large numbers when U.S. interest rates increased as tapering got underway. As a result, the value of the Indian Rupee fell precipitously over the US dollar.
In response, the Reserve Bank of India (RBI) increased interest rates to curb inflows of foreign funds and stabilize the Rupee. But this choice hurt the common consumer by making inflation worse due to a stronger dollar and increased import prices.
Economic impact on India
The taper tantrum of 2013 has created a significant economic impact on India. Below, we will learn about its impact on the Indian economy in detail.
● Increased borrowing cost: As India was not prepared for the taper tantrum, the country faced multiple economic impacts including increased borrowing costs. The surge in global interest led to RBI tightening its policies. As a result, it caused increased borrowing costs.
● Currency depreciations: Another essential economic impact of taper tantrum is currency depreciation. Due to American currency outflow Indian currency tumbled causing a currency depreciation.
● Rise in inflation: Lastly, the country saw a rise in inflation as a part of the taper tantrum impact on the Indian economy. During this period the dollar became strong. Also, the increased rate of imports caused an increase in the inflation rate in India.
IV. Case studies
Learning about the taper tantrum becomes easier with case studies and real-life examples.
Examples of taper tantrum events in India
The taper tantrum in the US in 2013 caused a lot of chaos around finance and the economy in many countries. It negatively impacted the US stock market as well as the Indian market. India dealt with the rise in inflation rate, outflow of foreign funds, and weakening of the Indian rupee soon after the tapering started. It also triggered panic among foreign investors of the Indian market, and the interest rates were hiked.
The financial resilience of the US stock market made the jolt created by the taper tantrum transient. India also reflected the same picture as the US market recovered and thrived. In India, Sensex surged by 105% from 2013 to 2020, showing the financial resilience of the Indian market.
Sectoral impact and analysis
The taper tantrum of 2013, triggered by the US Federal Reserve’s announcement to reduce its bond-buying program, significantly impacted India’s economy. Sectors like financial services, real estate, and manufacturing faced capital outflows and currency depreciation. The Indian rupee weakened sharply, leading to inflationary pressures and higher import costs, particularly in oil and gold. Investors shifted away from emerging markets, causing a temporary slowdown in growth and increased borrowing costs across sectors.
V. Government and policy response
To make the Indian economy stable and prevent the market from crumbling during and after the taper tantrum, the Indian government and RBI responded with several police changes.
Measures taken by the Indian government
After the taper tantrum occurred a lot of money was pulled out from the Indian market, causing a massive economic disturbance in the country. To fight off the ill effects of the taper tantrum on the country’s economy and prevent the market from crumbling, the then government of India took several measures. From the finance minister of India to the Prime Minister of India, everyone took strong steps to encourage transparency in policymaking and reduce reliance on the Federal bank and imports to support the domestic economy.
Changes in monetary policy
Apart from the government initiatives the Reserve Bank of India also made significant changes in the monetary policies to battle off the impacts of the taper tantrum in the Indian economy. Some of the notable policy changes include:
● RBI increased the interest rate to fight capital outflow and increased import rates during the taper tantrum.
● The Reserve Bank of India has also reduced capital control as a part of fighting against the impact of the taper tantrum in the Indian economy.
VI. Future outlook
Taper Tantrum has had a multifaceted impact on the Indian economy. Here are some future outlooks the country is embracing to deal with the aftereffects of the taper tantrum.
Potential risks and mitigation strategies
Taper tantrum is not only harmful for the stock market it also creates a negative impact on the overall economy of a country and also globally.
Here are some potential risks of taper tantrum:
● Tapering can cause a jolt in the stock market as interest rates are hiked.
● It also increases the outflow of foreign funds negatively impacting the economy.
● Stock assets can become riskier because of reduced liquidity.
● Stock prices can significantly decrease because of a fear of market decline or even crumbling.
● Continuous elevation of the inflation rate affects the common man.
The US taper tantrum in 2013 impacted India and the whole world. It has taught us some key lessons on how risks related to tapering can be mitigated. Here are some mitigation strategies that can be used to deal with taper tantrum:
● Always stay informed about the global market and key economic events.
● Financial resilience is crucial for dealing with the taper tantrum.
● Too much dependency on the Federal bank should also be reduced to avoid extreme negative impacts.
● A long-term investment approach is essential when tapering creates short-term market downturns decreasing the price of assets.
● A transparent system is paramount to reduce the risks related to the taper tantrum.
Long-term effects on the Indian economy
The US Federal Bank’s decision to taper created a crippling effect on the developing economies. It led to some long-term effects on the Indian economy. Here are some of them:
● A weakened Indian rupee and a stronger dollar impacted India’s currency rate for the long term.
● Inflation caused by the taper tantrum also has a long-term effect on the Indian economy.
● The stock market of India was also affected because of capital outflow.
However, experts think that though the tapering created a financially hazardous situation all over the world, it was short-lived because of positive market sentiment.
Read More: Indian and US stock markets: A comparative analysis
VII. Conclusion
A taper tantrum is technically an economic event when central banks initiate bulk purchases of domestic assets and securities to support the native economy. This results in a global economic disturbance.
Summary of key points
The first Indian and global markets learned about the taper tantrum with Fed-initiated tapering of the Federal Bank of America that declared a slowdown in its quantitative easing process. This has helped the US to stabilise the effects of the 2008 financial crisis. However, this leads to an adverse effect on the global economy, especially in emerging markets like India.
As the country didn’t prepare for such market volatility it has to face multifaceted impacts including a rise in inflation, currency depreciation, and fear-related capital outflow. However, the government took various initiatives and made several changes in the monetary policies to fight off the ill effects of taper tantrums on the country’s economy.
At least, even through some serious currency rate drops and financial risks, the country managed to prevent a significant market crumble. Also, the Indian government and RBI are still making thoughtful economic policies to slowly wind off the aftereffects of the taper tantrum.
FAQs
1. When did the taper tantrum start?
The taper tantrum first took off in May 2013 when the United States Federal Reserve announced a reduction in its bond-buying program which had been functional since the global financial crisis.
2. What happened in the 2013 taper tantrum?
In 2023, the US Federal Reserve announced its wish to reduce its bond-buying or quantitative easing program. This caused panic among investors increasing the US treasury yields.
3. What is the taper tantrum?
A taper tantrum refers to a central bank’s decision to scale back or reduce its program of quantitative easing. Here, a central bank slowly reduces its bond or asset-buying process.
4. What did the term ‘taper’ imply in the term taper tantrum?
‘Taper’ or ‘Tapering’ is a strategy used by central banks to reduce their bond-buying process. Tapering usually happens when there is a fear that the market will crumble in the coming days.
5. What is the taper tantrum in India?
The Taper Tantrum in 2013 triggered market volatility in India. There is a spike in investors pulling out their investments from India and other emerging markets.
