It's a word that's been setting financial markets on edge since it was first raised by the US Federal Reserve in May. The start of "taper" - a trimming of the central bank's US $85 bn a month stimulus program, which has seen trillions of dollars pumped into the US economy since last September was expected to be announced. Despite widespread expectations that the Federal Reserve would begin reducing the stimulus it provides the economy through quantitative easing, the Fed said that it will maintain its current pace of Treasury and mortgage bond purchases.
Global emerging economies such as India are heaving huge sighs of relief. As the tapering has been postponed, financial asset markets will get new wings again. Stocks and bonds will soar, and gold will rise. For India, this is a much-needed saving grace that would see some dollars, which have flown out in the last two months to the tune of nearly US $8 bn, start to flow back into the economy.
With the uncertainty regarding the Fed out of the way, all eyes will now shift towards the RBI. Raghuram Rajan will review his first monetary policy on Friday that will provide a first glimpse on the new governor's approach to tackling the country's growth-inflation dynamics and external vulnerabilities.
Rajan needs to arrest India's worst economic slowdown in a decade even as exchange-rate volatility remains near a five-year high. The rupee's 9% rebound from a record low in August gives the RBI room to scale back steps taken since mid-July to tighten cash supply. Although most people expect that RBI will likely use this space provided to strengthen its forex position and keep the lid on the depreciation pressure by maintaining status quo on interest rates. However, we could be in for a surprise.
Investors are boosting bets that Rajan will signal a reversal in his predecessor's tightening measures as the rupee strengthens. If this happens, it would be welcomed by the markets.