Economic Roundup, June 22, 2018

Economic Environment

  • US-China trade war

  • RBI meeting minutes

How are the Indian and global economic environments affecting the financial markets?

  • Global trade has once again affected the financial markets worldwide this week by initially sharply lowering the equity markets (after which they recovered) because of the escalating trade war between the US and China and much of the rest of the world. India has also slapped tariffs on some agricultural and steel products it imports from the United States in retaliation to US tariffs on its global aluminum and steel imports. The hope is that the United States’ strategy is to escalate to descalate trade tensions because it is really negotiating with its trading partners for reciprocal and symmetric bi-lateral trade relations and, as US president Trump stated at the recently concluded G7 summit in Canada, it ideally prefers low or no tariffs and a more open Chinese economy in technology and financial services. Global trade tensions need some time to work themselves out and until then it is expected that the process of their resolution will continue to affect financial markets worldwide but more so in China, Europe, Canada, and Mexico than in India given India’s relatively less exposure to the trade issues involved as compared to these other countries/regions.
  • As discussed in the June 08, 2018 issue of the Economic Roundup, the RBI meeting minutes clearly reveal that its neutral stance is to give itself flexibility to act in the future based on the developments in growth and inflation. However, as much as consumer spending is raising growth, it is also becoming inflationary adding to other inflationary factors such as the oil price and the RBI’s recent rate increase which will raise the cost of capital investment and eventually prices across the economy. With the RBI saying that the gap between actual growth rate and potential growth rate has closed, any higher growth rate would also be inflationary because of lack of slack in the economy. Higher interest rates in the future will slow growth because of the higher cost of business financing but may not lower inflation as much due to sectors in the CPI basket such as food, health care and education being less interest rate sensitive. RBI may need to raise interest rates more times in the coming months to keep CPI inflation at its target of 4% in the medium term.

What to expect from the markets next week?

The equity and commodity (including oil) markets are expected to remain stable and trade in a range-bound manner. There are no sufficient domestic or global triggers yet to push the markets down in India because actual enforcement of tariffs by US economy and its major trading partners is not yet sufficiently large to have a significant economic impact on any country.

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