(Updates with quotes, details, background)
By Subhadip Sircar and Rajesh Kumar Singh
NEW DELHI/MUMBAI Dec 19 India is better
prepared than it was months ago to deal with the Federal
Reserve's reduction of its monetary stimulus, Finance Minister
P. Chidambaram said on Thursday, as the rupee fell only slightly
in the wake of the once much-feared decision.
Surging currency reserves and the fall in the current
account deficit have reassured investors about India's
vulnerability to a Fed "taper", analysts said, after fears about
it sent the rupee to a record low in late August.
The rupee weakened about 0.1 percent on Thursday, and was
trading around 62.19 to the dollar, around 10.7 percent stronger
than its August nadir.
In contrast, the Indonesian rupiah on Thursday
touched a five-year low against the dollar after slipping about
0.5 percent. The sizable current account deficits in both
countries had made them the epicentre of the sell-off in
emerging Asian currencies that escalated in August.
In 2013, the rupee has weakened about 11.5 percent against
the dollar, while the Indonesian currency has shed about 21
The increased confidence in India has allowed the Reserve
Bank of India (RBI) to remove most of its emergency measures
imposed earlier this year. It is now more focused on dealing
with a domestic economy suffering from what some analysts call a
stagflationary environment of low growth but high inflation.
"(The) government is of the view that the markets had
already factored in the U.S. Federal Reserve's decision and
therefore is not likely to be surprised by these moderate
changes," Chidambaram said in a statement.
The comment comes after the Federal Reserve on Wednesday
said it would scale down its monthly bond purchases by $10
billion a month, to $75 billion.
Analysts credit measures taken by the Finance Ministry and
the RBI for turning around sentiment, after both came under
criticism for what was seen as a shaky initial response to fears
of Fed tapering that sparked a market sell-off between late May
and late August.
Curbs on gold imports, such as higher duties, helped narrow
India's current account deficit to a more than four-year low of
1.2 percent of gross domestic product in July-September, far
below a record high 4.8 percent in the previous fiscal year.
India also built up its foreign exchange reserves to an
eight-month high of $295.71 billion, as of Dec. 6, in part
because of measures that helped banks raise $34 billion in
overseas loans and deposits from the Indian diaspora.
Meanwhile, the prospect of heavy foreign selling of Indian
assets is looking less likely as most of the yield-chasing hot
money that entered the country - especially its bond markets -
has largely exited, analysts said.
Foreign investors have turned net buyers of debt, with
inflows of $518.22 million so far this month, although net sales
still reach $8.31 billion for the year. In equities overseas
funds are net buyers of $19.06 billion.
"India is better prepared for the Fed this time," said
Jonathan Cavenagh, currency strategist at Westpac in Singapore.
"Foreign holdings of Indian bonds are sharply lower compared
to April/May of this year and the current account deficit is
also considerably lower so I see less headwinds for India this
Still, a top finance ministry official told Reuters the RBI
and the government are closely monitoring developments.
Chidambaram spoke to the central bank governor, Raghuram Rajan,
earlier in the day.
Rajan has also repeatedly expressed confidence about India's
ability to withstand any Fed "taper".
Instead, the RBI's priority is fighting inflation, having
raised interest rates by 25 basis points each in September and
October despite signs of faltering economic growth.
The RBI surprised investors by keeping rates on hold on
Wednesday citing signs of easing vegetable prices and the weak
economy, but said it was ready to resume rate hikes depending on
Any rate hikes that boost the attractiveness of Indian
yields for foreign investors could be offset by the hit to
confidence about India's growth rate, analysts said.
(Additional reporting by Swati Bhat; Editing by Rafael Nam and