U.S. announces stimulus withdrawal, Rupee and Sensex plummet

June 22, 2013

In an announcement which created waves in global stock markets, U.S. Federal Reserve Chief Ben Bernanke announced a gradual withdrawal of the extraordinary monetary stimulus programme, which ensured very low interest rates in America but simultaneously released very large sums of money, some of which found its way to India and other emerging markets in search of higher return than available at home. The announcement has led to fears of short-term flows fleeing the markets, dragging down the rupee and stock indices, which brings us to the serious weakness of India’s external sector and its abject dependence on short-term flows to fund the balance of payments.
Why the US is withdrawing the stimulus?
The withdrawal of the stimulus would be linked to the U.S economy reaching definite sign posts such as the unemployment rate coming down to 7% . The authorities are confident in the durability of economic growth. It is this confidence that is behind the decision to pull back the stimulus later this year, but in a gradual fashion.
Altogether, the growth prospects of the U.S. economy have improved. This improvement should, ideally, have been beneficial for Indian economy too but the fear of foreign inflows leaving the market has rendered just opposite scenario.

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