MPC note shows export stagnation a long-term trend

The Monetary Policy Committee noted that since its meeting in October, global economic activity has remained subdued

The Reserve Bank of India (RBI) has significantly cut its economic growth forecast for the current and next financial year. Apparently, its concern to rein in inflation rate has prevailed while deciding not to cut the repo rates, at least for now. 

On the external sector, the Monetary Policy Committee (MPC) noted that since its meeting in October 2019, global economic activity has remained subdued, though some signs of resilience are becoming visible. Growth has shown signs of picking up in some advanced economies (AEs) and emerging market economies (EMEs). 

Crude oil prices have moved in a narrow range in both directions, reflecting the constantly changing sentiments relating to the progress of the US-China trade talks. Inflation has generally remained benign in major AEs and EMEs in Q3 of 2019. Global financial markets were buoyed in October by risk-on sentiment stemming from renewed optimism on a trade truce between the US and China and possibility of a Brexit deal. However, selling pressure took hold in the second half of November on renewed fears of US-China trade talks getting stalled on the Hong Kong standoff.  While the US dollar weakened against other major currencies, EME currencies have been trading with an appreciating bias, said the RBI governor in the fifth bi-monthly monetary policy statement.  

The statement also acknowledged that that exports contracted in September-October 2019, reflecting the persisting weakness in global trade, but non-oil export growth returned to positive territory in October after a gap of two months. Imports contracted faster than exports and as a result, the trade deficit narrowed in September-October 2019. This part of the statement seemed to gloss over the fact that export stagnation is a long-term trend and import contraction has more to do with slowdown in the domestic economy. 

Elsewhere, the statement does say that manufacturing firms expect weak demand conditions and reduced input price pressures, but they also expect muted output prices reflecting further weakening of pricing power.

On the financing side, the RBI paints a rosier picture reporting an increase in net foreign direct investment, net foreign portfolio investment, net disbursals of external commercial borrowings, and foreign exchange reserves.  

This means the non-merchandise foreign exchange inflows are keeping rupee at the present overvalued levels, affecting the export growth. The RBI has now allowed users to undertake over-the-counter (OTC) currency derivative transactions up to $10 million, without the need to evidence underlying exposure. Banks shall be provided with the discretion, in exceptional circumstances, to pass on net gains on hedge transactions booked on anticipated exposures. 

International Financial Service Centre Banking Units (IBUs) will be allowed to open foreign currency current accounts of their corporate borrowers, subject to the provisions of FEMA 1999 and to accept fixed deposits in foreign currency of tenor less than one year from non-bank entities with a view to facilitating ease of operations.

The RBI says in line with the slowdown in the economy, goods and services tax (GST) collections so far have fallen below budgeted targets and a similar scenario with regard to direct taxes and customs duty collections cannot be ruled out. In the meantime, the lower tax collections have started delaying the disbursal of refund claims of exporters and compensation for the states for shortfall in their revenues. 

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