the depreciation, countries remained wary of their exchange rate overshooting on the downside, especially given the possibility that some domestic corporations may have un - hedged foreign currency debt. there were also concerns about the inflationary consequences of exchange depreciation, worry that the short term boost to competitiveness will not increase exports when partner - country growth is sluggish, and imported intermediate content of exports is generally increasing. there remained the risk that tighter monetary policy in hitherto capital recipient countries can slow growth and exacerbate a pattern of slowing growth. significant falls in stock markets, if they persist, could also hurt growth through wealth effects. in fact, spillovers are not inconsequential even for industrial countries. 10 year rates in japan, germany and uk were all impacted after may 22, 2013. recent trends in indian financial markets 19. in india, the impact of the fed announcement has been striking, as in the case of many other emerging markets, especially those with current account deficits. the net fii disinvestment from the indian debt market since may 23, 2013 ( till august 30, 2013 ) was around us $ 10. 4 billion as compared to net investment of us $ 5. 6 billion during the period january 1 - may 22, 2013. there were reversals in fii investments into equity segment from india as well, with net fii disinvestment into equities since may 23, 2013 ( till august 30, 2013 ) standing at usd 2. 8 billion as compared to the investment of usd 14. 35 billion during bis central bankers ’ speeches the period january 1 - may 22, 2013. the impact on indian financial markets was one of the most severe amongst emerging markets. between may 22 and september 4, 2013, i. the currency depreciated by 17. 3 per cent ; ii. india ’ s equity market was down by 7. 9 per cent ; iii. 10 year interest rates were higher by 123 basis points ; during this period, us 10 year yields rose by about 100 bps. the volatility in financial markets spread like a contagion through the interconnectedness in markets with the rupee depreciation weighing on the stock market, foreign outflows from the debt market further aggravating the fx markets and impacting yields as also the equity markets. things have improved considerably since early september though the risks of heightened volatilities persist, as i will

shortly discuss. triggers and drivers 20. a key driver of capital inflows over past years had been loose monetary policies in mature economies, which were “ pushing ” money into the em world. this was helped by strong growth in ems, “ pulling ” money into those countries. when both the factors lost strength recently, investors became increasingly concerned about an exit from easy monetary conditions, notwithstanding the announcement of an aggressive expansionary policy in japan. additionally, growth in many emerging economies has lost some momentum recently, while growth prospects in mature economies have brightened somewhat, thus reducing the relative attractiveness for developed market investors to move capital abroad. the fed comments on may 22 were the immediate trigger which brought these factors to centre stage. 21. india, as one of the major absorbers of foreign capital has been vulnerable to these global trends. but, it was not only india ’ s problem – many ems were hit, albeit to different degrees with domestic macroeconomic conditions, especially the current account deficit, to some extent moderating or accentuating the headwinds from the tapering announcement. structural factors 22. these trends were sparked off by fears of surging global risk aversion and a worsening environment for capital flows in the wake of the fed statement. there were, however, some domestic structural factors which aggravated the trends. key in this regard has been the deterioration in india ’ s external sector performance including a high trade and current account deficit. the deterioration in the external sector, which began in q3 of 2011 – 12, has persisted. the impact of external developments on indian economy was mainly evident through trade channel and more recently through finance and confidence channels. although india ’ s exports started showing deceleration in month of october during fy 2011 – 12, the impact of slowdown in major trading partner countries on india ’ s exports was more pronounced in 2012 – 13. during 2012 – 13, merchandise exports contracted by 1. 8 per cent as compared with a rise of 21. 8 per cent in 2011 – 12. growth in export to major trade partner countries either declined or decelerated in 2012 – 13. in particular, exports to trading partners, viz., eu, china, singapore, hong kong and japan were impacted significantly. even though sluggish trend in exports continued in q1 of 2013 – 14, there have been signs of recovery from july 2013 onwards. despite slowdown in domestic economy in 2012 – 13, india ’ s merchandise imports grew marginally. although non