The Reserve Bank of India has said that the country is ready for the US Federal Reserve's tapering. In its eighth Financial Stability Report released today, RBI said, external sector risks have been reduced considerably and the effect of the tapering on the economy is expected to be limited and short-lived.

It said, delay in the tapering of the 85 billion dollar-a-month bond buyback programme by the US Federal reserve gave the country time to replenish the forex reserves and rein in the high current account gap.

Earlier this month, the US Fed had announced that it would cut back bond buying by 10 billion US dollars a month to 75 billion dollars from January, on the back of improvement in the world's biggest economy.

The RBI also said that the current account deficit, CAD is expected to be less than 3 per cent of the GDP during the current financial year. CAD shot up to an all-time high of 4.8 per cent last year on account of a heavy trade deficit and higher gold imports. The high CAD, along with fears of tapering, was one of the reasons for the rupee touching a lifetime low of 68 rupees 85 paise against the dollar in August this year.

The rupee improved since then, but is still 14 per cent lower. The authorities acted on multiple fronts, curbing gold imports, opening currency swap windows to get fresh dollar flows, and increasing money market rates to reduce speculation.

In his foreword to the half yearly Financial Stability Report, RBI Governor Raghuram Rajan today said that high inflation is limiting the central bank's ability to boost growth with an accomodative monetary policy. He said, the outlook for the economy has improved, with export growth regaining momentum, but growth is still weak.

The report said, a modest improvement in growth is envisaged in the second half of the current fiscal on the back of good monsoon which has boosted the prospects of summer crops and higher exports.

The RBI Governor said, to maintain the momentum gained by the respite, it is imperative that long-delayed legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track.