Sunday February 17, 2019
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Rupee to remain volatile in the midst of Greek crisis, says Arvind Subramanian

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By NewsGram Staff Writer

The Indian government on Monday said it was closely monitoring the Greek situation and euro market movements after austerity proposals by creditors being rejeted in a referendum posed the possibility of the country’s exit from the euro zone, while the rupee may be affected due to the outward flight of investment.

“In these situations what mostly happens is there is flight to dollars, to a safe haven. Rupee might also be affected by that. But nothing gets unusual at all so far,” Chief Economic Advisor Arvind Subramanian told reporters here.

“This is a drama which is going to play out for some time. We are well protected in at least three ways. Our macro-economic situation is much more stable. We have reserves. We are an economy which is still a very attractive investment destination. So I think we are relatively well insulated,” he said.

“As for the crisis itself, it is going to going to be long and prolonged,” he added.

Over 61 percent of Greeks voted “no” on Sunday, responding overwhelmingly to Prime Minister Alexis Tsipras’ calls to reject a proposal by the country’s creditors for more austerity in exchange for a financial bailout.

On possible impact of the crisis on Indian economy, Subramanian said that as the crisis plays out, “financial markets are going to be volatile. Both the ECB (European Central Bank) and Fed (US Federal Reserve) will take this into account”.

“We will have to see how the euro moves now. We are closely monitoring the Greek situation. There could be some reaction on the Fed rate hike,” Finance Secretary Rajiv Mehrishi said.

He had last week expressed apprehension that if yields on euro bonds go up, it might impact inflows and outflows from India.

Indian industry feels that if a crisis developed for Europe due to Greece, India too could feel the tremors like the rest of the world.

What is worrying is that the overall situation with regard to India’s merchandise exports does not look promising this year and the troubles in Europe could only deteriorate the prospects,” the Associated Chambers of Commerce and Industry of India (Assocham) said in a statement here.

“There is a need for RBI and the finance ministry to keep a close eye on the muddy global situation and its possible effect on India’s capital flows and the currency movement,” it added.

India’s merchandise exports continued to decline for the second month this fiscal, down by over 20 percent at $22.35 billion in May from $27.99 billion in the same month of the previous year, official data showed last month.

The Federation of Indian Export Organisations (FIEO) has warned that the continuing decline in exports would result in layoffs, besides putting pressure on the current account deficit (CAD).

FIEO president S.C. Ralhan also agreed with RBI Governor Raghuram Rajan’s recent remarks that the central banks globally were at risk of slipping into the kind of beggar-thy-neighbour strategies, leading to the Great Depression of the 1930s again.

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Rupee Depreciation Against Dollar Leads to Sharp Rise in Crude Prices

The rupee lost heavily towards the end of the week - over 70 paise in the last three trading session.

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The currency losing against the dollar and rising crude oil prices was a double whammy for the bond markets. Pixabay

In a choppy week’s trade, the Indian currency weakened against the US dollar to close above the 71 a dollar mark on Friday, owing to a sharp rise in crude oil prices, turmoil in the equity markets and uncertainty around the US-China trade relations.

In what could translate into further trouble for the domestic currency, analysts see an upward move of 6 to 7 per cent in the Brent crude prices in the coming week.

The rupee lost heavily towards the end of the week – over 70 paise in the last three trading session – as traders reacted to the sanction on Venezuela and production cut by OPEC and Saudi Arabia.

Sajal Gupta, Head Fx & Rates Edelweiss, said “technically … crude now looks set for another 6-7 per cent rise” which would mean that the rupee was likely to depreciate further in the coming sessions. “And if Rs 71.80 per dollar is broken, we can head towards Rs 72.50 mark.”

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The rupee lost heavily towards the end of the week – over 70 paise in the last three trading session. Pixabay

Among other factors impacting the currency, Gupta said, with crude and dollar index giving breakout, rupee would remain under pressure. Trade deficit data released on Friday post market was also not very encouraging with monthly deficit touching almost 15 billion dollars.

“Political tensions would also remain heightened with key leaders vowing strong retaliation in wake of the biggest terror attack in the Kashmir valley.”

Explaining the factors which has caused volatility, Anindya Banerjee of Kotak said the currency markets largely depend on the capital flows … and right now the fear of a possible retaliation by the government in response to the Pulwama attack is having an affect.

“The context of the whole event is also important because (Lok Sabha) elections are around the corner,” Banerjee said.

Also, the currency losing against the dollar and rising crude oil prices was a double whammy for the bond markets, he added.

On the global front, discussing the factors affecting the currency, Banerjee said, the Chinese economy was very fragile right now and moreover investors were looking for developments in the US-China trade talks.

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India on Friday revoked the Most Favoured Nation Status (MNS) of Pakistan which has led to decline in equite markets for 6 straight years. Pixabay

However, Gurang Somaiya, currency analyst, Motilal Oswal, felt that the rupee was protected from any major weakness as “Foreign Institutional Investment (FII’s) came around good”, especially in February.

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According to data from the bourses, FII has seen inflows worth Rs 1,096 crore in February.

India on Friday revoked the Most Favoured Nation Status (MNS) of Pakistan and has warned that more stern actions will follow the attack in Pulwama. Additionally, equity markets have declined for 6 straight sessions showing weak investor sentiments. (IANS)