17 MAY 2018
Slide of the currency and a widening trade deficit present the RBI with a huge dilemma
India’s macroeconomic threats lie exposed as it grapples with the rupee’s slide. The currency sunk to a closing low of 68.07 against the U.S. dollar on Tuesday, its lowest level in 16 months, before recovering slightly the next day. The rupee, already one of the worst performing Asian currencies, has now weakened 6.2% in 2018. The rise in crude oil prices through this year, amidst rising geopolitical tensions in West Asia and dwindling global supply, have obviously hurt the rupee and the trade balance. Meanwhile, despite a depreciating currency, India’s merchandise exports are stumbling instead of gaining from the opportunity. April clocked a sharp decline in exports from employment-intensive sectors such as readymade garments and gems and jewellery, according to official data. The trade deficit has consequently widened to $13.7 billion in April, compared to $13.25 billion in the same month in 2017. The value of oil and petroleum product imports increased by 41.5% from last year to hit $10.4 billion. U.S. sanctions following Washington’s withdrawal from the Iran nuclear deal and a June 22 meeting of OPEC should drive oil price trends hereon. Oil prices apart, the tightening of U.S. monetary policy has almost always spelled trouble for emerging market economies hooked to Western capital inflows. This time it is no different; capital outflows are scuppering the currencies of many emerging market economies.
As the U.S. Federal Reserve has come to adopt a more hawkish stance, investors in search of higher risk-adjusted yields have started to pull money out of emerging markets. Yields on emerging market bonds have risen as investors sold them off aggressively. The yield on the 10-year bond issued by the Indian government has risen to more than 7.8%, from 7.1% in early April. Foreign portfolio investors (FPIs) pulled out ?15,500 crore from India’s capital markets in April, which is the highest monthly outflow since December 2016. Not surprisingly, about two-thirds of the outflow was attributed to the bond market. The current headwinds from the reversal of capital flows were only to be expected. India is better placed than countries such as Argentina or Turkey. But that’s no reason to be complacent as external account risks can get out of hand very quickly. A hike in the RBI’s benchmark interest rates could stem the capital exodus, but with core inflation picking up and the government keen on a rate cut as a growth catalyst, the RBI has an unenviable dilemma on its hands. Policymakers, blessed with relatively benign external economic conditions after the taper tantrum of 2013, will have to find means to spur exports — whether by facilitating swifter GST refunds or taking on tariff and non-tariff barriers from the developed world. Efforts to diversify India’s energy basket also need greater stress.
Death in Gaza
The deaths at the Gaza-Israel border show the continuing toll of occupation
The violence in Gaza that preceded the opening of the American embassy in Jerusalem on Monday has once again reminded the world of the dangerous consequences of President Donald Trump’s decision to move the U.S. diplomatic mission from Tel Aviv to the disputed city. When Mr. Trump first announced the shift, making good a campaign promise, many had warned it would trigger violence in the Palestinian Territories besides complicating any peace processes. On Monday morning, across Gaza, a tiny Mediterranean strip that has been suffocatingly blockaded by Israel and Egypt for years, loudspeakers urged Palestinians to rush to the border with Israel and protest. On the border, Israeli soldiers fired into the crowd, killing at least 60 people; it was the worst day of violence since Israel attacked Gaza in 2014. The embassy shift and the disproportionate response at the Gaza border, crucially, came on the eve of the 70th anniversary ofNakba, the day to mark the forced eviction of hundreds of thousands of Palestinians from their homes in 1948. Gaza has been burning for the past few weeks. Dozens of protesters had already been killed before Monday’s incidents. The callous way in which Israel dealt with the protests shows the utter disregard Tel Aviv and the international community have for Palestinian lives.
Shortly after the Gaza violence, at the embassy opening ceremony, Israeli Prime Minister Benjamin Netanyahu didn’t show any remorse over the death of Palestinians. Instead he called it a glorious day, while Jared Kushner, Mr. Trump’s son-in-law and adviser, said that “those provoking violence are part of the problem and not part of the solution”, referring to the protesters. The real problem is that there is no meaningful effort to restart the peace process, which is the only way forward to end violence and address the political and humanitarian concerns of the occupied territories. Mr. Trump had promised to make his own peace plan, but his decision to move the embassy to Jerusalem, which most countries do not recognise as Israel’s capital, has only worsened the crisis. Jerusalem is seen as part of a final settlement between the Israelis and the Palestinians. Though the whole city is now under Israeli control, the Palestinians lay claim to East Jerusalem, including the Old City, as their capital. They are now trapped in this cycle of violence. Despite repeated promises from the outside world, they are caught in the status quo — the Israeli occupation of the West Bank and East Jerusalem and the blockade of Gaza. With Mr. Trump recognising Jerusalem as Israel’s capital, Palestinians fear that facts on the ground are being manipulated further to their disadvantage. The international community must not remain silent; for starters, there must be an inquiry into the carnage at the Gaza border.