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Contributed by CRISIL Economy Research | Updated on November 25, 2018 Published on November 25, 2018

Rupee gains on easing crude prices

November is proving to be a month of recovery for the rupee. After posting an all-time low of 74.4 per dollar in October, the currency recovered sharply to 71.2 in the week-ended November 23, 2018. So far this month, the rupee has averaged 72.4 per dollar, marking a gain of 1.7% .

Sliding Brent crude prices to below $65 per barrel, easing fears of higher current account and fiscal deficits, have helped matters. In addition, expectations of slower rate hikes by the US Fed in 2019 rekindled foreign investor interest in emerging markets. But FPIs have net invested only $0.8 billion in India this month — that too, mostly in the debt market.

Trade deficit rises

Merchandise exports grew 17.9 per cent and imports 17.6 per cent on-year in October. Despite marginally faster exports growth, trade deficit, at $17.1 billion, was $2.5 billion higher on-year because of the sharp rise in oil prices in October. While oil trade deficit was $3.4 billion higher, non-oil trade deficit was $0.9 billion lower.

Given higher trade deficit, Crisil expects the current account deficit to average 2.6 per cent of gross domestic product (GDP) this fiscal compared with 1.9 per cent of GDP in fiscal 2018. If the recent decline in oil prices sustains, import growth will soften, but export growth still faces headwinds from weaker global trade owing to escalating trade wars.

Domestic liquidity under stress

Systemic liquidity slipped deeper into deficit in November despite high government spending. The Reserve Bank of India has net injected $808 billion in the month so far (under repo, term repo, marginal standing facility and standing liquidity facility) compared with $641 billion in October.

Higher currency in circulation owing to the festive season could be one of the reasons for lower liquidity in the system. As on November 9, currency in circulation was 23.3 per cent higher on-year. Tight liquidity is also exerting pressure on short-term interest rates. Rates on six-month commercial paper averaged 9.13 per cent, 12 basis points (bps) higher on-month.

UK, EU agree on draft Brexit deal

The UK and the EU finally agreed upon a draft withdrawal agreement . To avoid a hard Northern Ireland border, the UK and EU agreed upon a backstop solution wherein the UK would stay in a customs union with the EU until a free trade agreement is finalised.

As long as the UK stays in the customs union, it will have to accept EU rules on competition, environment, goods standard, and employee protection. The withdrawal agreement also upholds the previously agreed upon commitments over citizens’ right and the £39 billion divorce bill that the UK has to pay the EU after Brexit.

Contributed by CRISIL Economy Research

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