Government announces measures to boost exports and housing

Indian Economic Update

  • The Finance Minister (FM) recently announced measures to bolster exports and housing. On the exports front, the FM announced revised priority sector lending norms for exporters, which will release an additional funding of INR 360 billion - INR 680 billion to them. Consumer Price Index (CPI) at 3.2% remained stable as last month – benign inflation for 11th consecutive month. Core inflation was 20 bps lower MoM at 4.2%.
  • The FM also announced housing sector incentives, including an INR 100 billion special window to provide last-mile funding for completion of ongoing housing projects which are not Non-Performing Assets (NPAs), interest rate on housing building advance for Government employees being lowered and linked to the 10-year G-sec yields, as well as relaxation of External Commercial Borrowing (ECB) guidelines to help housing developers obtain overseas funds.
  • Trade deficit for August remained muted amid a sharp decline in imports (-13.4%) of all major items. Exports also contracted by 6% in August amid a sharp base and challenging global trade environment. Import contraction was led by both a substantial base and lackluster demand conditions at home.

Global Update

  • The Federal Open Market Committee (FOMC) cut its policy rate by 25 bps to a range of 1.75%-2.00% but there appeared to be considerable divergence within the committee reflected in the voting pattern and the dot plot.
  • The Interest on Excess Reserves (IOER), which works as a floor for the overnight rates, was cut by 30 bps to 1.8% in order to reduce the cost of funds that are prevailing in the system and responding to the recent tightening in funding conditions.
  • The Bank of England (BOE) maintained status quo and made subtle changes to its policy statement to acknowledge recent local and global developments. Mild dovish revisions were made to the near-term growth and inflation outlook, respectively. The policymakers reiterated that leaving the European Union without a deal would have adverse impact on growth and prices.
  • The Bank of Japan (BOJ) kept the policy rate unchanged at 0.10% as expected while reiterating that extremely low rates will remain for a prolonged period, at least through the spring of 2020. Further, the bank has expressed readiness to add more stimulus if required.
  • Oil prices witnessed one of its worst trading days on Monday, after two major Saudi facilities were struck, destabilising approximately 6% of global supply. Brent futures rallied by nearly <20>% recording its second largest intra-day gain since its inception in 1988.

Equity

Indian equities ended lower, dragged by a heavy sell-off in banking and energy stocks amid incessant foreign fund outflows. Market sentiment also turned weak after the US Federal Reserve slashed the policy rate by 25 basis points, but dimmed hopes for further rate cuts as it took a cautious approach to further reductions in borrowing costs.

 

During the week Sensex gained 1.68% to close at 38014.62 while Nifty advanced 1.79% to close at 11274.2.

Debt

Indian bonds ended higher today amid reports that Government plans to stick to FY2020 borrowing target. Sharp fall in US yields also boosted bond prices.

 

The 10Y benchmark yield ended at 6.80% as compared to the previous week’s close of 6.64%.

Oil

Oil prices rose sharply supported by supply risks brought about by last weekend’s drone attacks on Saudi oil infrastructure and a cut in US interest rates. The head of International Energy Agency (IEA) said there is no need to release emergency oil stocks as markets remain well supplied.

Gold

Gold is trading higher as the focus returned to global growth risks and Middle East tensions, helping bullion recover slightly from the prior session’s slide after the US Fed cut interest rates, but gave mixed signals on any future easing. Also, lower Dollar index is further extending support to yellow metal.

Currency

The Indian Rupee ended weaker against the US Dollar today as Brent crude rose over on supply concerns from Saudi Arabia. Persistent Dollar sales by foreign banks supported the Rupee.
Dollar index is trading lower following another rate cut by the Fed at the FOMC meeting on Wednesday while indicating that future actions are likely to remain data dependent.
EUR/USD is trading higher, driven by Dollar weakness. GBP/USD is trading lower, post BOE policymakers unanimously voted to keep the key interest rate unchanged.


Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and CRISIL.