Lessons learnt from Taper Tantrum are still fresh, keeping a keen watch on US Fed's moves : FM Sitharaman

Finance Minister NIrmala Sitharaman

Finance Minister Nirmala Sitharaman in an exclusive interview to Network 18 said that the government is keeping a keen watch on the US Fed's decisions and that lessons learnt from the Taper Tantrum are still quite fresh in their mind.

Sitharman was referring to the 2013 Taper Tantrum effect that took place because the United States Federal Reserve said it would gradually reduce quantitative easing instituted after the Lehman Brothers bankruptcy in 2008.

Prior to that, from 2008-2013 the Fed had tripled the size of its balance sheet from around $1 trillion to around $3 trillion by purchasing almost $2 trillion in Treasury bonds and other financial assets to prop up the market. Investors had come to depend on the massive Fed support for asset prices through its purchases.

Eventually, when the Feds made the call to reduce bond purchases, investors started selling their bonds, depressing the price of bonds as a result, and shooting up the yields.

You can read a full explainer on the Taper Tantrum and its impact here

The finance minister assured that nothing of that sort will happen again.

She said, "The RBI has been keenly watching the situation to see how Fed moves will play out. Lessons learnt from Taper Tantrum are fresh in our mind. Making sure that none of that will happen. We are watchful and will make necessary steps leading toward it".

The FM's remarks come at a time when the US Fed has indicated that it is likely to hike interest rates in March and have reaffirmed plans to end its bond purchases that month as well.

"The committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so," said the US central bank chief Jerome Powell.

Subsequent interest rate increases and an eventual reduction in the Fed's asset holdings would follow as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank's 2 percent target.

The effects of the Fed's moves have already trickled down to India, where the Indian equities saw a whopping Rs Rs 28,243 crore being pulled out by Foreign Portfolio Investors (FPIs).

"With US Fed signalling that it will start hiking interest rates soon and shrink its bond holdings, FPIs went on a selling spree in the Indian equity markets," Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, told PTI.