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How India went from boom to bust

After a period of rapid expansion, India’s car market entered a slump indirectly triggered by the U.S. Federal Reserve’s announcement that it would start to gradually phase out its ultra-loose monetary policy.

Until then, one unintended effect of quantitative easing had been a bull market in emerging economies including India as fund managers shifted their portfolio assets oversees where they could earn higher yields.

The mere warning by the U.S. Federal Reserve in May 2013 that it would eventually taper Quantitative Easing prompted foreign institutional investors to dump $12 billion worth of stocks and bonds on the Indian market over the following four-month period, according to International Monetary Fund  estimates.

The resulting sell off was massive, sudden, and had “an immediate impact on the currency and the broader economy” in India, the International Monetary Fund concluded in a working paper.

In an attempt to ward off a balance-of-payments crisis and correct a widening trade deficit no longer financed by investor fund flows, India waged an unprecedented campaign against domestic demand for gold, its second-biggest import after oil.

Confidence in the rupee plummeted and inflation soared, prompting the central bank to ratchet up interest rates. As the cost of borrowing for consumers surged to nearly 12 percent, the auto market fell into a state of shock due to the high proportion of financed car sales.