Taper Tantrum

In May 2013, US Federal Reserve Chairman Ben Bernanke hinted in Congressional testimony that the Fed might begin tapering its quantitative easing program — the massive bond-buying that had flooded emerging markets with cheap capital since 2008. The hint alone was enough to trigger a panicked reversal of capital flows out of emerging markets worldwide.

India was among the most severely affected. The rupee crashed from ₹54 to ₹68 per dollar in a matter of weeks — the fastest and deepest fall since 1991. India's current account deficit had ballooned to nearly 5% of GDP, leaving it acutely exposed to any reversal of capital inflows. The RBI's attempts to defend the currency drained foreign exchange reserves rapidly.

The RBI, with Raghuram Rajan as Governor from September 2013, responded with emergency measures: raising short-term interest rates sharply, imposing restrictions on gold imports to reduce the current account deficit, and launching the FCNR (B) bond scheme to attract NRI deposits.

Gold import restrictions — including a mandatory 20% export rule and a near-tripling of import duty — suppressed domestic gold demand for several years. Indian gold prices temporarily traded at a premium of ₹10,000+ per 10 grams over international prices, creating an enormous incentive for gold smuggling that persisted well into 2015. The Taper Tantrum showed how vulnerable India remained to external capital flows — a structural weakness rooted in the current account deficit.