MUMBAI: India’s central bank is supporting the currency and bond markets as delays in reducing harsh US tariffs hurt local assets.
In recent days, the Reserve Bank of India (RBI) has signalled unease with investors pushing for higher government debt yields, while data suggests it has bought about US$2bil of bonds to keep borrowing costs down.
At the same time, it is estimated to have sold about US$20bil in dollars from its reserves to stop the rupee from sliding to new lows.
The RBI is trying to hold the line while Asia’s third-biggest economy faces one of its toughest external shocks in years.
Governor Sanjay Malhotra, who had mostly taken a hands-off stance since taking office in December, is signalling to investors that the central bank has drawn a red line, a point beyond which it won’t allow the currency or yields to be pushed.
The RBI’s actions could be “aimed at preventing the rupee from weakening to new levels because of an issue that could be resolved soon,” A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd, said, referring to the ongoing trade talks.
On bonds, “clearly there’s concern from the government and the RBI” regarding high borrowing costs for longer-term debt, he said.
For India, the situation is clear: the rupee is Asia’s second-weakest currency this year, bond markets are struggling with heavy government debt supply, and local stocks are lagging behind regional indexes which are hitting record highs.
The strain has worsened as US tariffs - the highest in the region – choke exporters’ earnings and curb dollar inflows. A breakthrough on tariffs could turn things around.
HSBC Holdings Plc estimates that lowering US duties to 20% from 50% could lift India’s growth by half a percentage point –enough to spark a rally across asset classes, economists including Pranjul Bhandari wrote in a note.
Societe Generale SA and Goldman Sachs Group Inc expect Indian assets to rebound next year as growth stabilises and trade relations improve.
President Donald Trump this week said the United States was getting “pretty close” to a trade deal with New Delhi, the latest sign of a possible thaw in the dispute that has soured the relationship between the two nations.
For now, the RBI’s actions seem to be aimed at buying time until a pact is finalised, analysts said. — Bloomberg
