While the impact of the Fed’s tapering announcement was initially muted on India’s call money markets, following the RBI’s major intervention on 15 July 2013 – which included a sharp increase in the Marginal Standing Facility Rate (MSF rate) to 10.25% from 8.25% prior to the interventions – the call money market rates started rising sharply during July and August 2013. The weighted average call rates in the money market rose to 7.76% from 7.24% during June 2013. This was followed by a further increase in the weighted average call rates to 9.90% and 9.97% during August and September 2013 respectively. However, following the RBI’s subsequent move to scale back its exceptional intervention (lowering the MSF rate gradually to 9.5% on 20 September 2013, 9.0% on 8 October 2013 and 8.75% on 29 October 2013), the weighted average call rates declined to 9.03% as of October 2013.

The Fed has recently announced that it may hold off its planned move to taper its asset repurchase programme, contingent on more evidence of improvement in the U.S. economy; that provides a temporary reprieve for some emerging markets, including India. However, while this gives the RBI some leeway to manoeuvre, given that the currency depreciation in India is a complex product of both external factors (the aforementioned weaker global economic recovery) and domestic factors (most notably political uncertainties surrounding the forthcoming elections in mid-2014), the RBI will be put to task to manage these in light of the changing domestic events. Indeed, the threat of further depreciation on the Indian rupee has only been partially allayed, rather than mitigated.