INR can fall to record lows if opposition wins the elections, the implementing the NYAY will push up fiscal deficit and take up bond yields sharply.
With the Lok Sabha election results around the corner, high volatility will not be ruled out from the domestic currency market. If the current government continues to be in power, then it would result in a sudden appreciation of INR against all major currencies. On the contrary, any change in government in India will adversely affect the INR and the carnage, in that case, could be much more severe, as the INR would depreciate more rapidly.
Last week INR ended the week lower against USD amid US-China trade related concerns, foreign fund outflow and rising crude oil prices. Further the data showed India’s trade deficit widened to a five-month high in April due to rise in crude oil imports coupled with muted growth in exports. Trade deficit widened to USD 15.33 billion compared to a deficit of USD 10.89 billion in the last month and against a trade deficit of USD 13.72 billion in April 2018. INR depreciated by 0.45% against the USD last week and appreciated by 0.11% against the euro.
USD ended the week higher against major world currencies amid escalation in trade war, sharp fall in British Pound, release of upbeat U.S. economic data and Federal Reserve officials playing down the likelihood of interest rate cuts. USD Index (DXY), which tracks the movement of the USD against six major currencies, rose by 0.68% on a week on week basis and is at a level of 98.00.
USD started the week on a higher note on Monday and hit a four-month high against the Chinese yuan but was pressured by a rise in the safe-haven yen, as China retaliated against US most recent tariff salvo. The tit-for-tar tariff exchange between the United States and China returned, as China announced on Monday that it was raising tariffs on USD 60 billion of U.S. imports from June 1. The move comes days after Washington escalated the trade tensions with a tariff hike on USD 200 billion of Chinese imports on Friday.
However, on Tuesday, Chinese yuan rebounded following reports that China’s state-backed funds, also known as the “National Team,” injected cash into the markets in an attempt to support domestic markets and currency.
Further, President Donald Trump said in an interview that the U.S. is in a “great position,” noting that “our economy has been very powerful; theirs has not been.” Trump further said that he will meet his Chinese counterpart Xi Jinping at next month’s G-20 summit in Osaka, Japan.
Kansas City Fed President Esther George warned in a speech on Wednesday that “Lower interest rates might fuel asset price bubbles, create financial imbalances, and ultimately a recession,” and put the responsibility for any risk to the U.S. economy on “trade policy uncertainty and slower growth abroad, particularly in China, the euro area, and the United Kingdom.” In a separate appearance, New York Fed President John Williams warned that tariffs would tend to push up inflation.
Data released at the end of the week further supported the USD, as the number of people applying for unemployment benefits fell to 212,000 from the week prior, indicating that the U.S. economy continues to be strong despite the ongoing trade dispute with China. U.S. homebuilding also increased more than expected in April. Housing starts rose 5.7% to 1.235 million units last month.
British Pound fell sharply last week, as talks between the Labour and Conservative party stopped and the chances of a Brexit deal slimmed again. Further, the reports that U.K. Prime Minister Theresa May will step down over the summer regardless of whether or not her Brexit withdrawal agreement passes also weighed heavily on the pound. The prime minister has previously said that she would step down if the plan is passed.
Weekly Global Bond Market Analysis
US 10-year benchmark bond yields fell by 6 bps, U.S. government debt yields fell after President Donald Trump moved to block Huawei from buying American technology, further straining Sino-U.S. trade ties. recently U.S. increased the tariff rate on $200 billion worth of Chinese imports to 25% from 10% after Beijing attempted to renegotiate terms of trade agreement.
Germany 10-year benchmark bond yields fell by 6 bps, Germany benchmark medium-term bond yield has dropped to levels not seen for three years, amid a broad rally in safe-haven assets due to deepening China-America trade tensions, Brexit uncertainty and Italy fiscal breach.
UK 10-year benchmark bond yields fell by 10 bps after Brexit talks between British Prime Minister Theresa May government and the opposition Labour Party had broken down. Labour leader Jeremy Corbyn said that the negotiations have gone as far as they can go and that the two sides had been unable to bridge important policy gaps between us. It’s is now uncertain how the UK will leave the European Union. The market is in doubts whether Britain can avoid leaving the European Union without a deal.
Italy 10-year benchmark bond yields fell by 1 bps, Italian deputy PM Salvini remarked that the government is ready to exceed the 3% budget deficit. Salvini also said that the government is ready to allow debt-to-GDP to surpass 130% to 140% of GDP if it is necessary to improve labor market conditions.
Portugal 10-year benchmark bond yields fell by 6 bps, Spain 10-year benchmark bond yields fell by 9 bps.
Emerging economies 10-year benchmark bond yields were mixed last week.
China 10-year benchmark bond yields fell by 3 bps, Industrial production growth, the output of industrial sectors in China economy including manufacturing fell to 5.4% from 8.5% in March. Retail sales grew by 7.2% in April, well below 8.7% rate in March and lowest in 13 years
Indonesia 10-year benchmark bond yields rose by 1 bps, Indonesia central bank in its recent policy meet kept interest rates unchanged. Indonesia central bank said it will consider whether there is room to ease monetary policy, the first indication it’s given this year of possible interest-rate cuts. After 175 bps of hikes last year, policymakers in Southeast Asia’s biggest economy are reluctant to ease too quickly to avoid destabilizing the currency.
South Africa 10-year benchmark bond yields rose by 5 bps, Brazil 10-year benchmark bond yields rose by 34 bps. Russia 10-year benchmark bond yields fell by 11 bps, Australia 10-year benchmark bond yields fell by 9 bps
US benchmark Junk bond yields rose by 1 bps to 6.32%, Euro benchmark Junk bond yields fell by 7 bps to 3.55%.