Fear of trade war induces volatility

Indian Economic Update

  • The minutes of the Monetary Policy Committee (MPC) meeting held between June 04 and June 06, 2018 were not as hawkish as expected, and could be termed as being largely neutral and an extension of the policy statement. All members acknowledged the hardening of core inflation even after excluding HRA impact, an uptick in household inflationary expectations, rise in input costs and oil prices on one hand and closing of the output gap on the other, as reasons for the rate hike. The stance was kept neutral to give the flexibility to act in either direction, given the uncertainties around further developments of global commodity prices — particularly crude, food inflation, global trade wars and global financial market developments.
  • Export growth improved to a six-month high 20.2% YoY in May, aided by a favourable base. The base effect is likely to aid export growth further in June. A substantial boost to export growth came from the drugs and pharmaceuticals segment in May (26% YoY versus an average 11% YoY growth in the past six months). This was the fallout of a number of approvals for Indian drugs from the U.S. Food & Drug Administration in May, which aided these exports. Additionally, exports of other cereals (barring rice) have seen a significant surge of 170% YoY over the last three months, although the value of these exports is small (USD 42 million in May). Healthy export growth was also clocked by sectors like plastic and rubber products (36% YoY), electronic goods (19% YoY) and agricultural items (22% YoY).
  • Growth in imports surged to 15% YoY in May, aided by continued momentum in oil imports in value terms. The oil import bill in Q1 FY2019 will have to grapple with much higher crude prices so far, weighing on the trade balance. However, gold imports continued to contract for the fifth consecutive month, plagued by high bullion prices and a sharply high base (significant restocking demand ahead of the Goods and Services Tax (GST) rollout last year).
  • The Reserve Bank of India (RBI) has eased investment norms for foreign portfolio investors in debt, especially into individual large corporates. The RBI increased the Foreign Portfolio Investment (FPI) cap on investment in government security to 30% of the outstanding stock of that security, from 20% earlier.

Global update:

  • The Bank of England (BoE) maintained status quo on the monetary policy in line with expectations. However, there were two important changes:
    • The voting pattern of 6-3 of MPC members supporting the decision against a previous 7-2 split.
    • The MPC provided fresh guidance on when it plans to shrink the size of its balance sheet. The new guidance suggests that such a move could come earlier than expected.
  • Majority of the members are in favour of adopting a data dependent tone with the consensus within the MPC being that ‘news had given greater reassurance that the softness in the first quarter had been largely temporary’. In other words, an improvement in the growth outlook will mean that more members will be comfortable to vote for a rate hike. Inflation is expected to converge towards the 2% target level as the lagged impact of currency depreciation over 2016 wanes and is compensated by a pick-up in domestic inflation as the labour market is expected to remain robust. The tone of the policy statement showed that the majority of members implicitly assume a ‘soft Brexit’ scenario.
  • The US Current Account Deficit (CAD) widened to USD 124.1 billion or 2.5% of the Gross Domestic Product (GDP) in the first quarter of 2018 from a downwardly revised USD 116.1 billion gap or 2.4% of the GDP in the last three months of 2017. It is the biggest CAD since the last quarter of 2008.
  • During the week, US President Mr Donald Trump had threatened to impose 10% tariff on USD 200 billion worth of Chinese goods, escalating a retaliatory trade war with Beijing. He added that the move would be in retaliation to China’s decision to raise tariffs on USD 50 billion in US goods. Once the legal process is complete, these tariffs will go into effect if China insists on going ahead with the new tariffs that it recently announced.


  • Domestic benchmark equities lowered amid lingering concerns over the ongoing trade war between the United States and China. The benchmark equities had also ended higher sometime during the week, led by advances in financials, despite lingering US-China trade tensions.
  • Investors’ sentiments got a boost after the RBI announced purchase of government securities of up to INR 10,000 crore on June 21, 2018 to help in liquidity management.


During the week Sensex gained 0.19% to close at 35689.60 while Nifty inclined 0.04% to close at 10821.85. 


  • Government bond prices ended higher sometime during the week as RBI minutes offered a reprieve to the markets. Concerns of aggressive rate hikes were subsided by emphasis on maintaining a neutral stance. A fall in oil prices also aided well for bond investors.


The 10Y benchmark yield ended at 7.82% vs. previous week’s close of 7.89%.



  • The 174th bi-annual Organisation of Petroleum Exporting Countries (OPEC) meet on June 22, 2018 is being hailed by many as one of the most contentious and ambiguous meets since the Declaration of Co-operation (DC) was formed in November 2016. This historical framework of OPEC and 10 other nations appear divided on the production strategy of the oil cartel going ahead and have kept markets on their toes with various media reports and comments from oil ministers across nations, affecting prices. Although the official OPEC communiqué is likely to come out on June 22, 2018, there are other preliminary meetings on June 21, 2018 that may provide indications about the final outcome.
  • Oil prices edged lower after Iran, a major supplier within the producer cartel of OPEC, signalled that it could agree on a small increase in the group’s output during a meeting at OPEC’s headquarters in Vienna on June 22, 2018. However, prices were prevented from falling further by record refinery runs in the US and a large decline in US crude inventories, a sign of strong fuel demand in the world’s biggest economy.
  • In the 7th OPEC International Seminar in Vienna, officials from various energy and oil ministries and financial firms and other representatives from international organisations gathered to discuss the cooperation and sustainability of a secure and stable oil market in support of a healthy global economy.


  • During the week, the yellow metal had dropped to a six-month low and was under pressure amid the Dollar strengthening to multi-month highs and trade tensions between US and China escalating to dangerous levels.


  • The Rupee strengthened against the US Dollar as Public Sector Undertaking (PSU) banks and large private banks sold Dollar in the market. Dollar sales by exporters also helped the Rupee as Dollar index retreated from 95.5 level simultaneously.
  • RBI injected liquidity to the tune of INR 407.19 million (net) under Liquidity Adjustment Facility (LAF) (including fixed and variable rates, repos and reverse repos) as of June 20, 2018. It injected INR 2.5 billion and INR 23.93 billion under the Marginal Standing Facility and Special Refinance Facility, respectively.
  • The Rupee weakened against the Dollar, falling to over three-week lows as foreign banks stepped up Dollar purchases, likely on the back of FPI outflows that were possibly driven by news that the BJP has pulled out of the Jammu and Kashmir coalition government. Slump in local equities, coupled a with strong Dollar index, weighed on the sentiments.


Source: ICICI Bank Research and Bloomberg.