Can India survive QE tapering by Fed?

For years, emerging-market currencies benefited from the US Fed's ultra-low interest rates and easy-money policies. Since the time the US Fed adopted near zero interest rate, cheap money in the developed markets found its way to emerging markets, particularly ones in Asia. 

But this trend showed a sharp reversal when Fed Chairman Ben Bernanke signaled the move to exit quantitative easing (QE). More than US $47 bn has been withdrawn from global funds' investments in emerging market stocks and bonds since May 2013. The largest reaction of this was on the currencies of current-account-deficit (CAD) countries. These include the Indian rupee, Brazilian real and Turkish lira. These currencies were most vulnerable to Fed guidance because they rely so heavily on foreign capital flows to fund their current account gaps. This sell-off reminded everyone of the 1997 Asia financial crisis. But, according to CNN Money, the present situation is very different. 

The depreciation in Asian currencies is not a reflection of their regional economic weaknesses. The economic fundamentals of the region have strengthened due to the prudent economic policies implemented since the 1997 crisis. Similarly, Asian companies and financial institutions have built stronger balance sheets and healthier gearing levels. This has made them more resilient against market volatility. Asian policy makers are also more proactive and pre-emptive in managing asset price inflation and consumer credit. 

Additionally, Asian economies have benefitted from rising intra-regional trade, investments and consumer affluence. These trends will continue to drive the region's economic growth and cushion it from possible global capital outflows. It is true that QE pullback announcement has put pressure on Asian currencies. But it is more due to the result of improving growth prospects in the US. As a result money is starting to return back to the US. 

The US Fed's decision to postpone the "tapering" of its easy money policy has given emerging Asia valuable breathing space. But with continued uncertainty over the Fed's actions, how long before the Asian market sell-off begins afresh? 

It remains to be seen to what extent a scaling back of QE will impact financial market conditions in emerging Asia. What is clear, however, is that asset prices that have become unnaturally inflated by cheap money will correct. Whether or not in the proportion of 1997 crisis, the correction will be painful, for Asia in general and India in particular. 

Do you think Asia can survive the QE tapering by Fed?
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