- 07/02/2019 at 1:04 pm #1289221EduGorillaKeymasterSelect Question Language :
Read the following passage carefully and answer the questions given below it.
In May 2013, a statement by then US Federal Reserve chairman Ben Bernanke spooked global markets when he indicated that the US Fed will start to reduce or taper its bond purchase programme, known as Quantitative Easing.
The rupee plunged to an all-time low on August 28, 2013 when it touched 68.25 per dollar. The currency crisis was accentuated by a precarious fiscal and internal position, which prompted the Reserve Bank of India (RBI) and the government to take a series of steps to attract foreign fund inflows and impose curbs on import of non-essential items like gold.
Cut to the present. The US Federal Reserve is scheduled to meet on Wednesday, and is expected to create history yet again. The market is expecting the US Fed to raise interest rates for the first time in more than a decade.
Domestic markets are already feeling the heat with foreign investors pulling out and the rupee becoming the worst performing Asian currency in November: it declined by 2.1 per cent against the dollar. Foreign Institutional Investors (FII) have withdrawn $ 1.64 billion in November from the Indian market and outflows so far in December are about $ 850 million.
Liquidity has already become tight in the money markets, which has seen bond yields rise. Market participants are also demanding that the RBI infuse more liquidity, which the central bank did by infusing Rs 10,000 crore last week by purchasing bonds.
RBI Governor Raghuram Rajan said last week, “Whatever decision the Fed takes, we are prepared for any eventuality”. Mr Rajan expects a 25 bps hike by the US Fed. “India is much better off today as compared to 2013, as our inflation is under control despite three consecutive cash negative crop cycles. We also have a better foreign exchange reserve position supported by good FDI flows, and a stable political regime with a thrust on reforms,” said Rupa Rege Nitsure, group chief economist, L&T Finance Holding.
When the 2013 currency crisis unfolded, the country’s foreign exchange reserves were about $ 274 billion, sufficient to cover six to seven months of imports, as compared to eight to ten months, seen as a necessary condition for currency stability. At present, foreign exchange reserves are at $ 352 billion, which can cover nine months of imports. Higher foreign exchange reserves are seen as a cushion for volatility.
Bank of America Merrill Lynch, in a report, said it expects a 25 bps hike by the US Fed. It added the RBI is in a position to use $ 20 billion in case of an emerging market sell-off. “Foreign exchange intervention should further strengthen our call of RBI open market operation of $ 6-8 billion by March 2016,” the report said.
The country’s fiscal position has improved considerably as compared to what it was in 2013. In 2013-14, the fiscal deficit was 4.5 per cent of GDP – for the first six months the figure was much higher. Soon after taking charge in May 2014, the government has embarked on a fiscal consolidation path. It said it will bring down fiscal deficit to 3.9 per cent in 2015-16, and to 3.5 per cent and 3 per cent in the next two years.
Similarly, the current account deficit in the first quarter of 2013-14 zoomed to a record high of 4.9 per cent of GDP. A series of steps was taken to bring the deficit down. Benign crude oil prices too helped as the country imports one-third of its crude requirements. Current account deficit was 1.2 per cent of GDP in the first quarter of the current financial year and according to a recent report by Citigroup, is expected to be 1 per cent of GDP in 2015-16, mainly due to soft crude oil prices.
Consumer price index-based inflation, which was in double digits in 2013 has been contained. Since early 2014, RBI recognised retail inflation as its main gauge for price rises, replacing wholesale price index-based inflation. RBI and the government have also entered into a historical agreement in which the central bank’s target will be to bring down inflation to 4 per cent by March 2017.
While the country is not yet out of the woods on the growth front, things are looking up. A host of reforms like an increase in foreign direct investment in some sectors is likely to take the country on a higher growth path.Why is the domestic market at a disadvantageous position?
- Owing to high inflation
- Rupee has been the worst performing Asian currency in November.
- Owing to low foreign exchange reserves
- Owing to an unstable government
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