Economy Alerts . Rupee recovers on FPI return

From an all-time low of 74.4/$ on October 11, the rupee recovered to 72.7/$ on November 9. On average, the rupee has so far gained 0.7 per cent in November over October, averaging 73.1/$. The comeback of foreign portfolio investors (FPIs), especially in the debt market, is supporting the rupee. The waivers on US sanctions on India’s oil imports from Iran and easing crude oil prices, coupled with the signing of the $75-billion currency swap agreement between India and Japan, have rekindled investor sentiments. FPIs have net invested a modest $0.7 billion in India this month to date.

Yields on 10-year government securities (G-Secs) ended at 7.76 per cent on November 9, 32 basis points (bps) lower so far, over the month of October. Sentiments have improved significantly since oil prices started falling in October. Brent crude oil spot prices are currently hovering around $72.7 per barrel, 14.6 per cent lower on-month. Moreover, the Reserve Bank of India is also continuing its open-market operations (OMOs) of G-Secs for the third consecutive month. The RBI has already bought half of the ₹400-billion G-Sec purchases planned for November. The OMOs, coupled with lower government market borrowing in the second half of this fiscal, are expected to reduce oversupply of government bonds in the market.

Growth moderated in most global economies in the third quarter of calendar 2018, compared with the second. In the US, real gross domestic product (GDP) growth moderated to 3.5 per cent quarter-on-quarter (seasonally adjusted, annualised) from 4.2 per cent, on weaker residential investment and net exports. The Euro Area (EA-19) seasonally adjusted GDP growth slowed to 0.2 per cent on-quarter as against 0.4 per cent — the weakest since the second quarter of 2014 (preliminary estimate, subject to revision). China’s GDP growth also moderated to 6.5 per cent on-year in the third quarter — the slowest since the first quarter of 2009 — on faltering domestic demand. Manufacturing activity also slowed.

The US Federal Reserve maintained the federal funds rate during its meeting on November 8. Earlier in September, the Fed had unanimously raised rates by 25 bps to 2-2.25 per cent, marking the third rate hike of 2018.The Bank of England also left its benchmark policy rate unchanged at 0.75 per cent in November. In October, the European Central Bank (ECB) maintained its main refinancing rate at 0 per cent. The ECB also confirmed that its asset purchase programme at the current pace of €15 billion per month will continue until December-end. The Bank of Japan left its policy rates unchanged at -0.1 per cent in its October meeting, and stated that it will continue with monetary easing until inflation reaches 2 per cent.

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