Is Taper Tantrum coming again?

What is Taper Tantrum?:
U.S Treasury yields surge in 2013 and after that, investors found Federal Reserves slowly decreasing Quantitative easing program. The Fed announced that it would be reducing the Treasury Bond purchases in the open market to reduce the money flow into the economy. As a result bond Yields rose and Equity Markets fell and it is called Taper Tantrum.
Understanding Taper Tantrum:
After 2008 financial crisis and recession U.S Fed reserves announced a policy of quantitative easing (QE) which involves purchasing bonds and other financial assets to provide liquidity in the market and to promote the economy. A quantitative easing policy designed to put more money in the market and support the economy has been considered for the short term only. Economists believed if Fed Reserve supports the economy for a long time, will become consequences. Tapering which means slowly reducing the money flow into the economy was done by Fed reserves in 2013.

In 2013 World markets are recovering from the 2008 global financial crisis. Between 2008 to 2013 Fed Purchased $2 Trillion in treasury bonds and other financial assets to support the Market. Investors depend on Fed support for a long time. Fed Reserves announced the policy of reducing the bond purchases shocks the investors because with reduced bond purchases bond prices would fall. Bond investors immediately selling the bonds, results in bond yields on U.S Treasuries shot up. When Bond Yields decline, equity markets will outperform and as bond yields rise equity market returns fall.

What was the Taper Tantrum Impact on Stock Market?:
Taper Tantrum not only affected U.S Bond investors but also global markets as results investors pulled out their money including Asia. In India also money pulled out by foreign investors results in rupee fell over by 15% from May to August 2013 and RBI raise interest rates. After that Raghuram Rajan became RBI governor and encourage deposits by non-resident Indians. This led money inflows to $30 Billion and the rupee stabilized. Later Rajan admitted the idea of encouraging NRI'S came from bankers.

Economists Believed Stock markets would follow the tapering effect and the market would fall. But Investors understood the Fed bond purchase is for supporting the market. Dow Jones industrial average( DJIA) fell temporarily. Also, there were many reasons for not falling in the stock market. Fed again announces bond purchases in 2015 and also they feel the economy is recovering and the market was in good health. The Indian market was not much impacted by Taper Tantrum. Even in the 2008 financial crisis, India became an investment opportunity for global investors, FDI investments increased by 45%.

Taper Tantrum Again in 2021?:
Like 2008, the same conditions are going in 2021. Due to covid-19 Fed reserves and all central banks were purchasing bonds and pump money into their economy. Now covid cases are reducing and most of the countries are recovering. U.S inflation data are moderate and unemployment rates are declining. The worry now is Fed can take a break from bond purchasing soon and raise the interest rates. Emerging countries in Asia are well prepared for the Taper Tantrum-like incident. India on the other side may affect more by this incident because India's Forex Reserves is at an all-time high. Finance minister Nirmala sitharaman is confident that India did not face any risk regarding Taper Tantrum. The Last Time the Taper Tantrum happened, investors were panic and they learned lessons now. But Raghuram Rajan Warned, Fed pumped a lot of money into U.S Market and some money came into the Indian market. Taper Tantrum is a one-time event but if it's happening again and again, It's a warning sign for investors.

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Kundan Kishore
Curator of  " A Complete Course on Indian Stock Market "