10 reasons India Is Better Prepared For US Monetary Tightening

Emerging markets are getting jittery again, after strong second-quarter growth in the US reignited fears that the world's biggest economy, which has been on a near zero interest rate diet for over five years, could be ready to raise rates.

ET looks at why a repeat of last August's panic exodus from India is not likely.

1. CAD IS UNDER CONTROL

In August last year, Indian financial markets quaked as fears mounted that the country will not be able to fund its record current account deficit as the US begins to unwind its bond buying. Drastic measures by India have reined in the current account deficit.



2. EXPORTS LOOKING UP

Exports rose at almost double-digit rates in the three months to June. This rise in the exports has helped improve the current account deficit. With the US economy picking up pace, exports should improve further.

3. FISCAL CONSOLIDATION IS ON COURSE

An unchecked rise in government spending was one of the major reasons for imbalances in the economy such as high inflation, tight monetary policy and high current account deficit. The new government has adopted the fiscal consolidation roadmap proposed by the previous government. Fiscal deficit could drop to a sustainable 3 per cent of GDP by FY17.

4. FOREX RESERVES AT AN ALL-TIME HIGH

India has built up foreign exchange reserves that had been depleted in the push to meet the yawning current account deficit.

5. RUPEE IS FAIRLY VALUED

The rupee has depreciated over 5 per cent from its May highs. In that sense, much of the concern is already priced in and it may not fall too much from here.

6. INDIA'S OWN MONETARY POLICY IS STILL TIGHT

India had taken monetary measures after the turbulence of last August. Most of those measures remain in place and will provide comfort to markets

7. INVESTOR SENTIMENT IS HIGH

Investors are very bullish on India after the elections resulted in an unexpectedly strong mandate for the BJP.

8. FDI REFORMS WILL BRING IN MORE FOREIGN FUNDS

The new government has been pushing reforms to ease flows of foreign investments that should start yielding results soon, bringing in capital that will strengthen the country's external sector.



9. GROWTH IS LOOKING UP

There are tentative signs growth is picking up. This will further boost sentiment

10. DIESEL SUBSIDY COULD BE OVER IN A FEW MONTHS

The incremental, monthly 50 paise rise in diesel prices has worked and the subsidy on the fuel could end soon. A similar monthly rise could be coming for cooking gas and kerosene.