Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

India: Selected Issues

International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2016
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Information about Asia and the Pacific Asia y el Pacífico
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China Spillover Versus Taper Tantrum: How is India Different this Time Around?1

How does the China spillover episode of the summer of 2015 compare to the taper tantrum of the summer of 2013 in terms of the impact on emerging markets (EMs)? How did India fare following both bouts of global financial volatility, and how did India’s performance compare with those of other EMs? While India was badly affected by the taper tantrum, this Chapter finds that India was less affected than many other EMs during the China spillover episode, in part due to reduced vulnerabilities. India is also better positioned to weather future volatility, but further actions are needed to address elevated corporate-banking sector vulnerabilities and continued fiscal consolidation is key.

1. The recent episode of China-driven volatility differs from the taper tantrum in its nature of shock and transmission channels (Figure 1). The taper tantrum—following the May 22, 2013 U.S. Congress testimony about the possible tapering of the Federal Reserve’s asset purchase program—was mainly a financial shock, inducing a tightening of global financial conditions.2 In contrast, the China spillover—with the first stock market correction on June 10, 2015, the move to new exchange rate regime on August 11, and a second stock market correction on August 24—was mainly a real shock, affecting the global economy through commodity price and the trade channels. Nevertheless, the China shock also had financial spillovers, resulting in a sharp, albeit short-lived, spike in VIX (Chicago Board Options Exchange volatility index), as well as sizeable capital outflows from EMs and increased VIX-EM spreads.

Figure 1.Global Environment

Source: IMF staff calculations.

2. A somewhat different group of EMs was affected this time around than in the taper tantrum of 2013, with India being among the least affected (Figure 2).3 In the China spillover episode of 2015, the most affected EMs include Colombia, Malaysia, Kazakhstan, as well as Brazil, South Africa, and Turkey, which were also among the most affected during the taper tantrum of 2013. India, in contrast, was one of the least affected EMs following the China spillover episode. Market differentiation during the China spillover episode is found to largely reflect a country’s commodity dependence (in percent of its total exports), direct trade exposure to China, and macroeconomic fundamentals, such as inflation and current account imbalances. India is a net commodity importer and has small trade exposure to China, hence is not directly affected via the commodity price or trade channels. Importantly, since the taper tantrum, India has made significant progress in reducing inflation and its current account deficit—as a result, much reduced domestic and external vulnerabilities also played a role in shielding India from this bout of market volatility.

Figure 2.Impact on Emerging Markets

Source: IMF staff calculations.

3. EMs entered the China spillover episode with weaker macroeconomic positions and more limited policy space than during the taper tantrum period—while India is better positioned now, vulnerabilities remain (Figure 3).4 Many EMs now have negative output gaps and lower inflation gaps than in the taper tantrum period, limiting the scope for tighter monetary policies to stem capital outflows and alleviate depreciation pressures. External imbalances remain sizeable in many deficit EMs as most of them have suffered a negative terms of trade shock—India is again a notable exception as a net commodity importer. Financial risks have also built, especially in Malaysia and Thailand, with credit rising from already high levels. While this is not a concern in India, its financial vulnerabilities lie in elevated corporate leverage and stressed assets, as well as eroded banking sector buffers. Moreover, non-financial corporate (NFC) U.S. dollar-denominated debt (in percent of GDP) has increased in a number of EMs, raising balance sheet risks as the dollar strengthens. Compared to their peers, Indian NFCs have a relatively small share of U.S. dollar-denominated debt. Finally, fiscal space to support growth appears more constrained in EMs. Many have either paused their consolidation plan or have provided stimulus, with less remaining space to counter future shocks. India also delayed its consolidation plan but shifted expenditure more toward public investment to upgrade its infrastructure. This improvement is welcome, but fiscal consolidation should continue as India’s public debt level and fiscal deficit remain high.

Figure 3.Which Countries Are Better Positioned to Weather Future Market Volatility?

Source: IMF staff calculations.


    BiR.2015Effectiveness of Emerging Market Policy Responses Since the Taper Talk,Chapter VII of India: Selected Issues IMF Country Report No. 15/62 (Washington: International Monetary Fund).

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Prepared by Ran Bi and Katsiaryna Svirydzenka.


See also Bi (2015) for an earlier analysis of India and EM responses to the ‘taper talk’ of mid-2013.


In Figure 2, ER denotes exchange rate; EMBI denotes emerging market bond index; TT denotes ‘taper tantrum’. India is denoted by a diamond with red label of IND (China spillovers) or blue label of IND (taper tantrum).


In Figure 3, TT denotes taper tantrum; CAB denotes current account balance; and PB denotes primary balance. In the top left panel of Figure 3, India is denoted by a diamond with red label of IND (China spillovers) or blue label of IND (taper tantrum); in rows 2 and 3 of Figure 3, India is denoted by a diamond with red label IND.

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