By Pavas Gupta
Even as the US-China trade war rages on, the world’s eyes are on India as the rupee depreciates to apocalyptically-low levels. Here are all the important stories from last week’s economic activities.
Rupee continues free-fall as government parachute fails
The Indian currency fell to a new record low of 72.91 against the dollar on Wednesday, only to recover at a high of 71.52 on Friday. Reports on government-planned measures to curb the free-fall of the rupee helped the currency gain ground in the past week. However, this momentum was short-lived.
On Friday, the government announced measures to enhance capital flow and reduce the current account deficit. These measures include exemption of withholding tax on masala bonds, permitting external commercial borrowings in the manufacturing sector up to $50 million with a maturity of one year instead of three years, relaxing the exposure limits of foreign portfolio investors in corporate bonds, and curbs on non-essential imports.
Experts feel that the aforementioned measures may not have a large impact on the currency. Resultantly, the rupee opened with a wide gap-down below 72 on Monday and was back under duress.
China retaliates with new tariffs against Trump
The US-China trade war shows no signs of abating as Beijing announced retaliatory tariffs on $60 billion worth of US goods. Conversely, the Trump administration threatened duties on virtually all Chinese imports.
On Monday, President Trump ordered his administration to levy 10% tariffs on around $200 billion worth of Chinese goods, set to be imposed on September 24. Further, he ordered a 25% increase in rate, in January, if Beijing refused to offer trade concessions. In retaliation, Beijing announced plans to target US goods, ranging from wheat to textiles, with 5-10% tariffs.
On the brighter side, both sides indicated that there was still hope for a trade deal.
Oil prices show signs of stability
Oil prices were steady on Wednesday, amidst concerns of producers not being able to respond to a shortfall in supply once US sanctions on Iran are enacted. These outweighed a gain in stockpiles in the United States – the world’s largest oil user.
On Tuesday, prices rose amidst media reports that Saudi Arabia – the world’s biggest oil exporter – was comfortable with prices climbing above $80 per barrel.
The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members, including the world’s biggest producer Russia, are scheduled to meet on September 23 in Algiers. The agendum for this meeting is how to allocate supply increases within their quota framework to offset the loss of Iranian oil supply.
India’s advantages eclipse macro fears: JP Morgan CEO
India’s stellar economic growth and critical reforms, such as the Goods and Services Tax (GST) and the first step in bank mergers, are advantages that far outweigh macroeconomic imbalances and a sliding currency, said Jamie Dimon, JP Morgan head.
In the June quarter, India’s economy expanded at 8.2%, fastest among all major economies. This year witnessed the implementation of major reforms such as a nation-wide GST and a bankruptcy law that is helping banks recover loans faster from defaulters. However, the downside to all this is the constant sliding of the rupee.
Hike in small savings might help the government reduce market borrowing
According to a report, a hike in interest rates on small savings schemes would help the government collect higher amounts from the National Small Savings Fund (NSSF) and may also help reduce its market borrowing for the second half of FY19.
On Thursday, the government raised interest rates on small savings schemes by up to 0.4% for the October-December quarter.
“We expect small savings schemes to provide an attractive alternative to bank deposits in the coming months, which should help the government to avail a higher net amount from the NSSF, compared to its target of Rs 1 trillion in FY19,” rating agency ICRA said in a report.
Pavas Gupta is a writing analyst at Qrius
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