Basu, KaushikEichengreen, BarryGupta, Poonam2014-10-302014-10-302014-10https://hdl.handle.net/10986/20493The "tapering talk" starting on May 22, 2013, when Federal Reserve Chairman Ben Bernanke first spoke of the possibility of the U.S. central bank reducing its security purchases, had a sharp negative impact on emerging markets. India was among those hardest hit. The rupee depreciated by 18 percent at one point, causing concerns that the country was heading toward a financial crisis. This paper contends that India was adversely impacted because it had received large capital flows in prior years and had large and liquid financial markets that were a convenient target for investors seeking to rebalance away from emerging markets. In addition, India's macroeconomic conditions had weakened in prior years, which rendered the economy vulnerable to capital outflows and limited the policy room for maneuver. The paper finds that the measures adopted to handle the impact of the tapering talk were not effective in stabilizing the financial markets and restoring confidence, implying that there may not be any easy choices when a country is caught in the midst of rebalancing of global portfolios. The authors suggest putting in place a medium-term policy framework that limits vulnerabilities in advance, while maximizing the policy space for responding to shocks. Elements of such a framework include a sound fiscal balance, sustainable current account deficit, and environment conducive to investment. In addition, India should continue to encourage relatively stable longer-term flows and discourage volatile short-term flows, hold a larger stock of reserves, avoid excessive appreciation of the exchange rate through interventions with the use of reserves and macroprudential policy, and prepare the banks and firms to handle greater exchange rate volatility.en-USCC BY 3.0 IGOADVANCED COUNTRIESADVANCED ECONOMIESASSET CLASSASSET CLASSESASSET PRICESBALANCE OF PAYMENTSBALANCE OF PAYMENTS CRISISBALANCE SHEETBANK DEPOSITSBANK POLICYBASIS POINTSBONDBOND FLOWSBOND FUNDSBOND SPREADSBOND YIELDBOND YIELDSBONDSBROAD MONEYBUSINESS ENVIRONMENTCAPITAL ACCOUNTCAPITAL ACCOUNTSCAPITAL CONTROLSCAPITAL FLOWSCAPITAL GAINSCAPITAL INFLOWSCAPITAL MARKETCAPITAL MOBILITYCAPITAL OUTFLOWSCAPITAL REQUIREMENTSCENTRAL BANKCENTRAL BANKSCOMMODITIESCORPORATE BONDSCREDIT LINESCREDIT RISKCRISES IN EMERGING MARKETSCURRENCYCURRENCY CRISESCURRENCY DEPRECIATIONCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITDEBTDEBT FLOWSDEBTSDEFICITSDEPOSITDEPOSIT MOBILIZATIONDEPOSITSDEVELOPING COUNTRIESDIRECT INVESTMENTDOMESTIC BONDDOMESTIC BOND MARKETSDOMESTIC MARKETSECONOMIC GROWTHEMERGING ECONOMIESEMERGING ECONOMYEMERGING MARKETEMERGING MARKET ECONOMIESEMERGING MARKETSEQUITY FLOWSEQUITY MARKETSEQUITY PORTFOLIOEQUITY PRICESEXCHANGE RATEEXCHANGE RATE MOVEMENTSEXCHANGE RATE REGIMEEXCHANGE RATE VOLATILITYEXCHANGE RATESEXPENDITUREEXPORTERSEXPOSUREEXTERNAL COMMERCIAL BORROWINGEXTERNAL COMMERCIAL BORROWINGSEXTERNAL DEBTEXTERNAL FINANCINGFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL INSTITUTIONSFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL VULNERABILITIESFINANCIAL WEAKNESSESFISCAL BALANCEFISCAL DEFICITFLEXIBLE EXCHANGE RATESFOREIGN ASSETSFOREIGN CURRENCYFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETFOREIGN EXCHANGE MARKETSFOREIGN EXCHANGE RISKFOREIGN INVESTMENTFOREIGN INVESTORSFOREIGN RESERVESGLOBAL FINANCEGLOBAL FINANCIAL STABILITYGLOBAL INVESTORSGLOBAL LIQUIDITYGLOBAL PORTFOLIOGLOBAL PORTFOLIOSGOLDGROWTH RATEHIGH INFLATIONHOLDINGHOLDINGSIMBALANCESIMMOVABLE PROPERTYIMPORTIMPORTSINCOMEINFLATIONINFLATION ENVIRONMENTINFLOWS OF CAPITALINSURANCEINTEREST RATEINTEREST RATE DIFFERENTIALINTEREST RATESINTERNATIONAL BANKINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL RESERVESINVESTINGINVESTMENT DECISIONSLEVEL OF DEBTLEVYLIABILITYLINE OF CREDITLINES OF CREDITLIQUIDITYLIQUIDITY PROBLEMSLIQUIDITY RISKLOANLOCAL CURRENCYLOCAL FINANCIAL MARKETSLOCAL INVESTORSLONG-TERM DEBTLOOSE MONETARY POLICYLOSS OF CONFIDENCEMACROECONOMIC CONDITIONSMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC VARIABLESMACROECONOMIC VULNERABILITIESMACROECONOMIC VULNERABILITYMARKET PARTICIPANTSMARKET PRESSUREMARKET STRUCTUREMARKET TURNOVERMATURITYMONETARY FUNDMONETARY POLICIESMONETARY POLICYOFFSHORE MARKETOIL PRICESOPEN MARKETOPPORTUNITY COSTPOLICY RESPONSEPORTFOLIOPORTFOLIO CAPITALPORTFOLIO CAPITAL INFLOWSPORTFOLIO FLOWSPORTFOLIO INFLOWSPORTFOLIO INVESTMENTPORTFOLIOSPRIVATE CAPITALPRIVATE CAPITAL FLOWSPRIVATE CAPITAL INFLOWSPRIVATE DEBTPRIVATE INFLOWSPRIVATE INVESTMENTPRIVATE SAVINGSPROPERTY INVESTMENTPUBLIC DEBTPUBLIC INVESTMENTRATE OF DEPRECIATIONREAL EFFECTIVE EXCHANGE RATEREAL EXCHANGE RATEREAL EXCHANGE RATESREDEMPTION OPTIONSREMITTANCESRESERVE BANKRESERVE REQUIREMENTSRESERVESRETURNRETURNSSECURITIESSHORT TERM DEBTSHORT-TERM DEBTSHORT-TERM LIABILITIESSHORT-TERM VOLATILITYSLOWDOWNSOLVENCYSTANDARD DEVIATIONSTOCK MARKETSTOCK MARKET CAPITALIZATIONSTOCK MARKET INDEXSTOCK MARKET PRICESSTOCK MARKETSSTOCK PRICESSTOCKSSWAPSWAPSTRADE CREDITTRADINGTREASURYTREASURY BILLSTREASURY BONDSTURNOVERTURNOVER RATIOTURNOVER_RATIOVALUATIONVALUATION CHANGESVOLATILITYWEIGHTSWITHDRAWALWITHDRAWAL FACILITYWORLD DEVELOPMENT INDICATORS10.1596/1813-9450-7071