Foreign portfolio outflows from Indian financial markets have been easing this month, bucking the broader EM trend. This may have been driven in part by the improvement in the virus situation. Looking ahead, the growing likelihood of the US Fed beginning to taper its asset purchases this year and an accompanying rise in US Treasury yields could reignite foreign outflows from Indian assets (as well as other EMs). But if they do pick up, India’s economy is much better placed to cope with a sustained bout of capital outflows than it has been in the past, most notably during the “Taper Tantrum” of 2013. After all, the current account is in surplus, FX reserves are close to all-time highs and the rupee does not look overvalued. One consequence of this is that the RBI will not rush to tighten monetary policy.
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