₹85.76 Lakh Cr: India’s Cushion Against the Next Taper Tantrum

One US Fed signal was enough to trigger a currency crisis in India.

In 2013, when the US Federal Reserve signalled that it could slow its bond-buying programme, global investors rushed out of emerging markets.

The rupee fell 22%, foreign investors pulled around $12 billion from Indian markets, and India was pushed into the “Fragile Five.”

More than a decade later, another global liquidity shock is back in focus.

Rising oil prices, geopolitical tensions, a weaker rupee and continued foreign selling are once again putting pressure on India’s external position.

But India’s financial position is very different today.

To understand why, let us look back at what happened in 2013.

After the global financial crisis of 2008, the US Federal Reserve turned to quantitative easing, buying bonds and injecting liquidity into the financial system.

Between 2008 and 2013, around $3 trillion was injected into the US economy.

As the US economy recovered, the Fed indicated in 2013 that it could begin slowing these bond purchases.

That small shift in expectations had a big impact.

Less US liquidity meant higher US yields, making US assets more attractive. Global investors began moving money away from emerging markets and back towards the US.

For countries such as India, the result was a combination of capital outflows, currency pressure and weaker financial markets.

India was particularly vulnerable at the time.

Its forex reserves stood at around $275 billion in August 2013, while the current account deficit had reached 4.7% of GDP in FY13. Inflation was also close to 10%.

With a large external deficit and significant dependence on foreign capital, India had limited room to absorb a sudden reversal in global flows.

The impact was severe.

The rupee depreciated by around 22% between May 1 and August 28, 2013. Foreign investment outflows between June and August were estimated at around $12 billion.

The Reserve Bank of India had to step in.

It sold around $14 billion in forex reserves between June and September 2013, introduced a subsidised FCNR(B) swap window that attracted around $26 billion, and helped bring in nearly $34 billion through an NRI deposit scheme.

The government also raised gold import duties to 10% to curb the import bill, while the RBI raised the repo rate to 8% to support the rupee and contain inflation.

The measures eventually helped stabilise the currency.

Fast forward to 2026, and some of the pressure points look familiar.

US-Iran tensions have pushed oil prices higher. The rupee has weakened to around ₹95-96 against the dollar. Foreign portfolio investors continue to pull money from Indian markets.

But India’s financial position is considerably stronger than it was in 2013.

Forex reserves stood at around $707 billion in August 2026.

The current account deficit is now around 0.6% of GDP, compared with 4.7% in FY13.

Inflation is also around 4%, significantly below the levels seen during the 2013 crisis.

That gives the RBI a much larger cushion.

Higher forex reserves mean a greater capacity to manage sudden currency pressure and smooth excessive volatility in the rupee.

There has been another structural change in Indian markets: domestic investors now have a much larger role.

Foreign portfolio investor ownership of Indian equities has fallen to a 17-year low of around 15.1%, while domestic institutional investor ownership has risen to around 19.5%.

Much of this shift has been supported by the rapid growth of mutual fund participation.

Mutual fund assets under management have increased nearly six times in the past decade, rising from ₹15.18 lakh crore in July 2016 to ₹85.76 lakh crore in July 2026.

Monthly SIP contributions have also surged nearly tenfold, from ₹3,334 crore in July 2016 to ₹31,961 crore in July 2026.

This matters during periods of global risk aversion.

When foreign investors reduce their exposure to Indian equities, a deeper pool of domestic capital can help absorb some of the selling pressure.

That does not make India immune to a global liquidity shock.

Higher oil prices can widen India’s import bill and put pressure on the rupee. A weaker currency can also increase imported inflation and affect corporate costs.

But the starting point is very different.

In 2013, India faced a large external deficit, lower forex reserves and heavy dependence on foreign capital.

In 2026, the country has a much smaller external gap, around $707 billion in forex reserves, and a significantly deeper domestic investor base.

For investors, the lesson is not that India is “taper-proof”.

It is that the country’s ability to absorb an external shock has strengthened considerably.

That could make the next global liquidity shock very different from the one India experienced in 2013.

Sources:

1. Moneycontrol
   
2. PIB
   
3. PIB
   
4. BBC
   
5. RBI
   
6. Reuters
   
7. Business Today
   
8. Moneycontrol
   
9. The Hindu
   
10. RBI
    
11. The Week
    
12. PIB
    
13. AMFI
    
14. Business Standard