(05 December 2019)DAILY MARKET BRIEF 1:A pause in easing cycle doesn’t do bad for INR

With geopolitical tensions rising amid the uncertain outcome of current Sino-American trade talks, EM currencies remain under constant pressure as China’s precondition to reach a phase one deal consisting of a rollback of US tariffs along with the US willingness to include topics such as intellectual property and technology transfer in the pact remain major sticking points. With fiscal policy apparently reaching its limits in India after Modi’s government already surpassed initial budget deficit in the first seven months of current fiscal year, the Reserve Bank of India decision to hold rates to mitigate price inflation surprises, particularly when considering continued downside risks on growth. Despite current rebound, we expect INR to decline as the 15 December 2019 deadline for tariffs worth $156 billion of Chinese products and a pending “unreliable entities list” from Beijing against US firms are still on the pipeline.

Fiscal stimulus in India’s economy appears subdued as the government already surpassed its fiscal deficit target, estimated at 102.40% or INR 7.2 trillion ($100 billion) while the RBI’s five interest rate cuts of its Repo Rate to current 5.15% (-1.10% year-to-date) has had a rather limited impact. Year-on-year economic growth lies at 4.50% (prior: 5%) in the third quarter, its lowest pace since March 2013, while the RBI’s growth forecast is now at 5% (prior: 6.10%) for the year ending March 2020, a rather negative view for Indian rupee as the RBI affirms that “there is space for further monetary policy action in the future”. Furthermore, with the US intensifying negotiations with its other trade partners and following first talks between Washington and New Delhi earlier in November that curiously concluded without a word on US dairy products, it seems that headlines are still to come on the matter.

By Vincent Mivelaz