Federal Reserve's tapering talks to have no major impact on India: analysts

The Federal Reserve's latest hint at an early end to monthly bond repurchases and an upward revision in interest rates from early 2015 is unlikely to have a major impact on India, according to analysts.

The US central bank last week also announced it would reduce its bond-buying programme to $55 billion from $65 billion every month.

"India, in our view, is in a much better position to deal with this scenario now," Deutsche Bank said in a report.

"Policy actions have reduced the economy's external account deficits and reliance of short-term external flows, fiscal consolidation has continued, and inflation respite is palpable," it said.

Domestic rating agency Care Ratings also said it does not see any major impact.

"The domestic economy is influenced majorly by local factors as opposed to external. Hence, it is expected to remain largely unaffected by the ongoing tapering programme of the Fed," Care said.

Both the forex and the stock markets did not show any knee-jerk reaction following the Fed announcement. In fact, two out of the three trading sessions since the announcement, the markets and the rupee gained.

The report further said the financial markets have rallied considerably in anticipation of an economic reform friendly election outcome, foreign investor interest has surged, the rupee has been remarkably strong (rose close to 12 per cent from the August depth of 68.85), and latest data suggest an economic recovery is in the making.

Deutsche Bank, however, also said it is not going to get carried away by the current wave of optimism.

"Our optimism rests instead on the fact that tough measures, such as fuel price hikes, monetary and fiscal tightening and FDI liberalisation have been taken over the past 18 months that will hold India on strong footing regardless of the election outcome," it said.

The report said that in the past one or two decades, the election cycles have come and gone, and markets have rallied exuberantly in the lead-up or aftermath of decisive electoral results.

"These rallies have almost inevitably fizzled though as the reality of running a large, complex, and noisy democracy set in," it said.

Deutsche said it is encouraged by prospects of the domestic economy and just doesn't have a strong view on which party can deliver more than the other.

The report further said it expects India's current account deficit in FY15 to be higher than this year ($50.5 billion against $36.6 billion), on the back of stronger imports growth (10 per cent y-o-y in FY15 as against 5.3 per cent likely in FY14).

"As restrictions on gold imports ease and economic momentum picks up, imports growth will turn positive and raise the trade and current account deficit," the report said.

It, however, did not expect gold imports to increase as sharply as in FY12 and FY13, to lead to renewed concerns on the current account gap front.

On the rupee, it said the currency is not seen breaching 61 on a sustained basis, as it expects the Reserve Bank to intervene and buy dollars below those levels.