• Invest
    Investment Suite
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Currency
    Non Convertible Debentures
    Sovereign Gold Bond
    Exclusive
    NRI Account
    Private Client Group
    Features
    SipIt
    MTF
    Investment Suite
    Exclusive
    Features
  • Platform
    Product Suite
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Features and Tools
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Payoff Analyzer
    Calculators
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    All Calculators
    Product Suite
    Features and Tools
    Calculators
  • Pricing
  • Research
    Research Calls
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Research Reports
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
    Research Calls
    Research Reports
  • Market
    Stocks
    Market Movers
    Large Cap
    Mid Cap
    Small Cap
    Indices
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    All Indian Indices
    Mutual Funds
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    All AMC's
    IPO
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Stocks
    Indices
    Mutual Funds
    IPO
  • Learn
    Resource
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Quarterly Results
    Investing Guide
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Commodities
    Currency
    Futures & Options
    Derivatives
    Margin Trading
    Events
    Budget 2024
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2024
    Resource
    Investing Guide
    Events
  • Partner
    Business Associates
    Fund Expert
    Kotak Connect Plus
    Startup connect
  • Support
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
​

What Is A Taper Tantrum And Is It Around The Corner?

  •  3m
  • 0•
  • 13 Apr 2023

‘Tapering’ is not a word you come across often. But these days, all the talk in financial markets is about when the US Federal Reserve will start tapering. So, can taper tantrum 2.0 be on its way? How will it impact you? Before that, let us understand what Tapering means in the financial world.

The Primer

You see, when the government wants to boost the economy - Moratorium on interest payments, EMIs, etc. are temporarily being provided. Similarly, when an economy is under stress and faces liquidity crunch, the central banks step in and buy bonds to induce liquidity into the economy. Basically, it increases money supply in the economy by buying out bonds in exchange for cash.

This is called ‘Quantitative Easing’ (QE). But, as they say in Wall Street that free money is like oxygen supply through ventilator. A person can survive only a few days on ventilator, isn’t it? QE acts in a similar fashion, albeit for longer durations. So, what next?

Taper Time

We saw this happening recently when the pandemic struck and all economies across were beaten. Central banks, including the Fed and RBI, embarked on measures to support the economy by reducing interest rates and putting more money in the hands of the people.

But, is there a possibility that the doles that the central banks give to the markets could be dialled back? Yes! Obviously, at some point in time, they have to stop distributing free money because when the economy revives, there is no need of oxygen line. This is when tapering comes into the picture. ‘Tapering’ is nothing but the Wall Street word saying stop infusing more money.

Previous Episode: 2013 Flashback

Something similar happened in 2008. The 2008 financial crisis triggered a long recession. At that time, the U.S Fed came up with the QE Plan. This helped keep the lending rates low and also increased liquidity in the economy.

Consequently, low lending rates encouraged more people to take loans and boosted spending. Then, once the economy showed signs of healing, the Fed announced reducing the QE program by 2013. This announcement created panic in the markets and that is how the word ‘Tantrum’ originated due to the overreaction of investors after the announcement.

Impact On Emerging Markets and India

Emerging markets including India, Indonesia, Brazil, and Turkey were severely hit by inflationary pressures in 2013 due to tapering. How? Allow me to explain. During the QE period, lending rates fell. Hence, those lending money in American market started looking at better places to park their excess money – which found its way into the markets like India. This led to an upswing in Foreign Institutional Investors (FIIs) in India.

Until one day in 2013, the Fed decided to begin tapering. As a result, American investors in India started to pull the plug on their investments in India as the interest rates in the U.S began to rise and gave them a better return option. Now, as FIIs pull out, the value of the Rupee depreciates. This forces RBI to hike interest rates. In turn, the US dollar becomes stronger, leading to a rising case of inflation in India.

Fast Forward to Today: Will the tapering impact the Indian economy this time around?

The US Fed is currently buying securities worth US$ 120 billion from the market. This month the Federal Government is expected to start tapering by slashing their bond-buying program.

Note that, with retail investors driving the markets now and India’s economy doing relatively well, the stock markets seem to be in a good position as compared with 2013. Further, the RBI has prepared the Indian economy well enough by accumulating sufficient forex reserves to the tune of US$ 63,300 crore. That said, how this taper situation pans out remains to be seen.

References:

https://economictimes.indiatimes.com/markets/bonds/why-does-the-fed-need-to-taper-why-is-it-such-a-worry-for-markets/articleshow/85689762.cms

https://www.bankrate.com/banking/federal-reserve/how-the-fed-could-taper-bond-buying/

Did you enjoy this article?

0 people liked this article.

What could we have done to make this article better?

Read Full Article >
Enjoy Free Demat Account Opening
+91 -

personImage
Enjoy Free Demat Account Opening
+91 -