11.16 Case studies

Case 1. The 2013 taper tantrum and the "Fragile Five"#

Context From 2008 the Fed bought Treasuries and MBS (QE) and held rates at zero. Yield-seeking capital flowed into EM bonds and equities. India ran a record current-account deficit in 2012–13 with high inflation.

Timeline

• 2 May 2013: US 10y at 1.66%¹. USDINR 53.65 on 1 May².
• 22 May 2013: Bernanke testifies to the Joint Economic Committee. The prepared text says the FOMC is "prepared to increase or reduce the pace of its asset purchases". In Q&A he says a reduction could come in the "next few meetings"³. US 10y 2.03%.
• 19 Jun 2013: FOMC press conference. Bernanke says it would be "appropriate to moderate the monthly pace of purchases later this year", ending them "around midyear" 2014⁴. US 10y 2.33%, and 2.52% by 21 Jun.
• 15 Jul 2013: The RBI raises the MSF and Bank Rate by 200 bp to 10.25%, tightening the corridor to squeeze rupee liquidity and defend the currency. The rupee had hit a record low of 61.21 the week before⁵.
• 1 Aug 2013: Morgan Stanley FX strategist James Lord's note "EM Currencies: The Fragile Five" names the BRL, IDR, ZAR, INR and TRY: currencies of countries with large current-account deficits financed by portfolio flows [S].
• 28 Aug 2013: USDINR record 68.80⁶. That is a 28% rise from 53.65 in four months.
• 4 Sep 2013: The RBI announces a USD/INR swap window for fresh FCNR(B) deposits of three years or more, open from 10 Sep to 30 Nov 2013⁷. FCNR(B) are foreign-currency non-resident deposits. Raghuram Rajan became Governor that day. The swap let banks raise dollar deposits from non-resident Indians and swap them to the RBI at a concessional rate.
• 5 Sep 2013: US 10y peaks at 2.98%⁸.
• India's 10-year yield (monthly average) went from 7.40% in June to 8.60% in September 2013⁹. Reserves excluding gold fell from $272 bn in April to $256 bn in August¹⁰.

Mechanism

1. Term premium shock. Tapering talk did not change the expected policy-rate path much (the Fed said rate hikes were far off). It raised the term premium on long Treasuries. By (11.14a), long yields rose without short-rate expectations moving.
2. Carry unwind. With US yields up 130 bp, the carry on EM assets fell relative to risk, and the forward premium puzzle reversed. High-yield currencies "came down the elevator" (11.9.2).
3. Selection by fundamentals and liquidity. Eichengreen and Gupta (2015, Emerging Markets Review 25:1–15 [V citation]) find that the countries hit hardest were those with large and liquid financial markets (easy to sell) and those whose real exchange rates and current accounts had deteriorated most in the boom. India met both conditions.
4. Policy. The RBI first used the rate corridor (MSF hike), which hurt growth. It then attracted dollars through a quantity tool (the FCNR(B) swap), which stabilised the rupee. Policy credibility under a new Governor also mattered.

Case 2. The 2022 Fed hiking cycle: growth stocks and the rupee#

Timeline and levels

• The Fed raised its target range from 0–0.25% to 0.25–0.50% on 16 Mar 2022, then hiked at every meeting except June 2023 (a pause) through 26 Jul 2023, to 5.25–5.50%¹¹. That is 525 bp in 16 months, including four 75 bp moves in 2022.
• US CPI inflation peaked at 9.1% y/y in June 2022¹².
• The US 10-year yield went from 1.63% (3 Jan 2022) to a high of 4.25% (24 Oct 2022) and ended the year at 3.88%¹³. The 10-year TIPS real yield went from −1.06% (30 Dec 2021) to 1.74% (3 Nov 2022)¹⁴, a 2.8 pp rise in real yields.
• The Nasdaq Composite fell 33.1% and the S&P 500 19.44% in calendar 2022¹⁵.
• USDINR went from 74.32 (3 Jan 2022) to 82.72 (30 Dec 2022), with a weakest close of 82.95 on 19 Oct 2022¹⁶. India's reserves excluding gold fell from about $603 bn (Aug 2021) to $495 bn (Sep 2022)¹⁷, partly from intervention and partly from valuation losses on non-dollar reserves as the dollar rose.
• The RBI's MSF/Bank Rate (FRED IRSTCB01INM156N) went from 4.25% in April 2022 to 6.75% in early 2023. Given the corridor width, that implies a repo rise from 4.00% to 6.50%, beginning with a 40 bp move between scheduled meetings in May 2022¹⁸.

Mechanism

1. Real-rate shock to long-duration equity. By Proposition 11.5, a stock with $r-g=2\%$ loses about a third of its value for +100 bp in $r$ with $g$ fixed, while one with $r-g=8\%$ loses 11%. Real yields rose 2.8 pp. Profitless growth stocks are the extreme case, with nearly all value in distant cash flows, and they fell the most. The Nasdaq's 33% fall against the S&P's 19% is the duration ordering.
2. Positive stock–bond correlation. This was an inflation shock, so the regime table in 11.13 predicts what happened: stocks and bonds fell together.
3. Dollar up, rupee down. US rate differentials and the smile's US-outperformance end drove DXY higher. The RBI let the rupee depreciate about 11% while spending reserves to smooth the move, the managed-float choice of 11.7.2.
4. India's relative resilience. The Nifty fell much less than the Nasdaq in 2022 (check the exact figure in your data lab). DII inflows offset FPI selling (11.12).

Case 3. The 2026 oil shock and the Fed (Sep) and RBI (Oct) hikes#

Timeline The war, oil and market timeline is in M12 · 12.8 Case 6 (the course's reference timeline); this case takes the rates and rupee angle. In brief: the war began on 28 Feb 2026, EIA Brent spot rose from $71 to a 2026 high of $138.21 on 7 Apr, and the rupee reached its record low of 96.82 on 20 May (11.11). The policy dates:

• 16 Sep 2026: Fed +25 bp to 3.75–4.00% (12–0), after having cut to 3.50–3.75% in Dec 2025. The September CPI was 3.7% y/y (released in October)¹⁹.
• 5 Oct 2026: US 10y closing high 5.31% and 10y real yield 2.95%²⁰.
• 7 Oct 2026: RBI +25 bp to 5.50%, unanimous; stance to "calibrated tightening" (4–2); FY27 CPI projected at 5.2% and GDP at 7.1%²¹.
• 28 Oct 2026: Fed holds (10–2), with Cook and Hammack dissenting for a hike²².

Mechanism: why hike into a supply shock? The textbook prescription is to "look through" the first-round price-level effect of an oil shock, because tightening cannot produce oil and only adds an output loss. Both banks hiked anyway, for reasons this module's tools make precise.

1. Second-round effects and the Taylor principle. By the time of the hikes, the shock had lasted more than six months, and diesel had more than doubled (M10). Prolonged energy inflation feeds wages and expectations. The breakeven/real split shows this: the US 10-year real yield reached 2.95% on 5 Oct, above every daily value since 2008 (FRED DFII10), so the market priced a hawkish reaction function. By Proposition 11.6, holding nominal rates while inflation rises is an easing.
2. Positive US output gap. The US gap was about +1.7% (CBO-based). An economy above potential with above-target inflation is the case where the Taylor rule, even with core PCE, calls for rates well above 3.875% (Worked example 11.5).
3. India's exchange-rate channel. For the RBI, the binding constraint was the rupee. The repo hike raises the rupee carry, supports FPI debt flows and limits imported inflation. Reserves were US$68.7 bn below the September record by 30 Oct (RBI WSS; part of that may reverse a one-off September inflow, 11.11). The hike is partly a substitute for further reserve sales. The Taylor rule with an exchange-rate term rationalises it.
4. Policy-rate spillover. With the Fed hiking, the INR–USD differential would have narrowed further without an RBI move (11.9.2).

Market response Long-duration assets suffered:

• gold traded near $3,900–4,100 in late Oct and early Nov, about 28% below its January high²³;
• the Nifty was down 3.8% y/y on 5 Nov [V];
• the curve bear-steepened.

When the US midterms on 3 Nov were read as raising the odds of de-escalation, Brent fell 8.7% on 4 Nov, US 10-year yields fell, and the Nifty rose 2.4% on 5 Nov²⁴ (M12 Case 7). That is exactly the oil → inflation → rates chain run in reverse.