The valuable monetary support provided by the Reserve Bank of India is not negligible: after reducing its Repurchase rate by a total of 0.85 percentage point year-to-date and injecting the equivalent of $5 billion in dollar-rupee auction on the banking system, RBI board members have validated the transfer of a surplus of INR 1.8 trillion ($24.4 billion) to the government in order to increase public investments. This should likely give great comfort to the Modi administration whose commitment to budget deficit target of 3.40% of GDP is not expected to change. Yet the outlook of the Indian economy is not expected to improve, as economic growth should remain at China’s 6.20% range in FY 2019. USD/INR is trading at highest range year-to-date (+2.80%), following the global trend of EM currencies following the breach of USD/CNY 7 threshold, suggesting that a recovery phase is subdued considering the tariffs escalation of both US and China.
The liquidity transfer worth a total of INR 1.8 trillion, including INR 1.2 trillion in regular dividend and 0.6 trillion in excess provisions, is likely to add leeway to PM Narendra Modi’s government to intensify budget spending in the coming months. Indeed, the recent announcement made by Finance Minister Nirmala Sitharaman, confirming an extensive package among which measures such as a fast-tracking goods and services tax refunds, repayment of arbitration disputes, the alignment of lending rates to repo or auto-related actions, incl. infrastructure developments for EVs and purchase incentives, should give some relief. However, the measures stay small as no broad-based fiscal stimulus nor tax reduction are expected due to budget constraints. Additional steps to revive real estate activities are also planned in the future. Despite the uptick in manufacturing PMI for the month of July, up 52.5 (prior: 52.1) and July CPI maintained at 3.15%, slightly below 4% target, the Indian economy is likely to close FY 2019 growth lower than prior year 7.20%. Despite RBI’s 6.90% estimate, Moody’s recently scaled down the gauge to 6.20% from prior 6.80%, stating tighter financial conditions and financial distress in rural areas. Furthermore, risks concerning tensions in Pakistan and further monetary policy easing are likely to confirm INR vulnerability.
Currently trading at 71.7075, USD/INR is likely to stay above 71.70 after bouncing from 68.80 low (31/07/2019 low).