Tapering

Tapering refers to the gradual reduction by a central bank — most notably the US Federal Reserve — of its quantitative easing (QE) programme, whereby it progressively decreases the monthly volume of bond purchases it makes in the open market to inject liquidity into the financial system. Rather than abruptly ending asset purchases (which could shock markets), central banks taper by reducing purchases in measured steps — signalling the normalisation of monetary policy as economic conditions improve. The announcement of Fed tapering in May 2013 (the 'Taper Tantrum') caused significant volatility in global financial markets including India — Indian bond yields spiked, the rupee depreciated sharply against the dollar, and equity markets sold off as FPIs withdrew capital from emerging markets in anticipation of higher US interest rates. A similar dynamic played out in 2021 to 2022 when the Fed signalled and then executed tapering of its COVID-era QE programme. For Indian equity and bond market investors, Fed tapering announcements are among the most significant macro events — they trigger FPI outflows from emerging markets (including India), rupee depreciation pressure, higher domestic bond yields, and sectoral rotation from rate-sensitive growth stocks toward value and defensive names. The RBI's response to Fed tapering — currency intervention, repo rate adjustments, and liquidity management — shapes India's domestic financial conditions during these periods.