Oil prices correct

After hitting a four-year high of $86 per barrel on October 4, Brent crude oil prices eased to $76 per barrel on October 26. Prices fell as oil inventories rose due to improving supply scenario and slowing demand. As indicated by the Organisation of the Petroleum Exporting Countries (OPEC), inventory levels are expected to increase further in the closing quarter of this calendar, putting downward pressure on prices, provided no restriction on output is imposed by its OPEC members. Oil prices had risen due to a steep decline in production from Venezuela, unrest in Libya and West Asia, and US sanctions on Iran. In 2018 so far, on average oil prices have risen ~40 per cent on-year.

Bond yields ease

Falling oil prices have helped the yield on India’s 10-year government security (G-Sec) slide below 8 per cent in October to 7.88 per cent on Friday, 19 basis points lower on-month.

 

The Reserve Bank of India’s open market operations worth $360 billion also helped offset the liquidity crunch caused by possible forex intervention. Meanwhile, foreign portfolio investors (FPIs) have withdrawn $1.7 billion net from the debt market so far this month. With this, the first seven months of fiscal 2019 have seen $8.7 billion net FPI outflow compared with a net inflow of $17.9 billion in the same period last year. Rising treasury yields in the US are the main reason behind the FPI outflows.

Signs of strain on fiscal front

Fiscal deficit of the Centre reached 95.3 per cent of the full-year target in the first half of fiscal 2019 — higher than 91.3 per cent of the target in the same period last year.

 

 

Lower non-tax revenue receipts as well as non-debt capital receipts (as a proportion of target) have been the main factors behind higher fiscal deficit this year. However, tax collections at 42.5 per cent of target have been higher than 40.2 per cent last year, driven by robust growth in direct tax collections. The total expenditure, at 52 per cent of the target, is slightly higher than 51.2 per cent last year, driven by higher capital expenditure.

Currencies slip against dollar

The rupee averaged 73.7/$ on average so far in October, depreciating 2 per cent on-month on a stronger greenback and net FPI outflow.

 

Fiscal so far, the rupee has slipped 7.3 per cent on-year, on average, as FPIs net-withdrew $15.7 billion from Indian markets. Sentiments have weakened on worries of contagion risks from Turkey and Argentina, and trade war fears. Also, investors are chasing high-yielding assets in the US. Besides the rupee, currencies of Indonesia, China, Malaysia and Thailand also weakened on-month against the dollar. Separately, the euro depreciated 1.3 per cent after Mario Draghi, president of the European Central Bank, highlighted the risks around Italy, Brexit and trade war during the bank’s October monetary policy meet, triggering a sell-off.

Contributed by CRISIL Economy Research

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