How does the Fed’s taper move impact Indian economy?

News: The US Federal Reserve has decided to speed up its taper timeline because of higher inflation, expanding economic activity and a stronger labour market.

What did the Federal Reserve decide?

In response to the coronavirus pandemic, the Fed had been buying $120 billion worth of  bonds every month.

Now, the US central bank said it would double the reduction of its monthly asset purchases to $30 billion, thereby concluding the tapering programme by March 2022 as against the previous timeline of mid-2022.

Why did the Fed speed up the timeline?

The following factors put pressure on the Fed to increase interest rates sooner than planned:

High inflation: US inflation levels spiked to 6.8% (the highest in three decades) in November 2021, due to

– Supply chain disruptions

– Increasing consumer demand led to

Read more: US inflation and impact on India

Improved labour conditions: Expanding economic activity has also resulted in improved labour market conditions. With the US economy picking up substantially and retail prices going up dramatically, the Fed is caught between rising inflationary trends and the need to revive the economy.

What are the potential impacts on the Indian economy?

Higher supply side inflation: A weakened rupee would result in increased landed price of crude oil.

Ensuing Impact on RBI’s monetary policy: Higher crude oil prices will only worsen the inflation situation in India and might put pressure on RBI to raise rates faster than anticipated.

– Read more: The question of US monetary policy

Source: This post is based on the article “How does the Fed’s taper move impact Indian economy?” published in Livemint on 20th Dec 2021.

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