Advanced‐country policies and emerging‐market currencies: The impact of US tapering on India's rupee

Abstract

The global financial crisis and its aftermath triggered extraordinary policy responses in advanced countries. Their impacts—from asset price bubbles to currency depreciations—have often been felt in the developing world, and the same can be expected from their undoing. India's experience around the Fed's ‘taper talk’ announcement of 2013 offers insights which could be relevant for other countries as quantitative easing programmes wind down and monetary policy is ‘normalized’. This paper estimates the contribution of external and domestic factors to long‐run trends and short‐term fluctuations in the value of the Indian rupee around the 2013 depreciation episode using a rich dynamic model that controls for a large number of exchange‐rate determinants. The paper finds that a global surprise factor, more than domestic vulnerabilities, was the main driver of the large rupee depreciation in the summer of 2013.