India Rupee Steady This Week As Corp Tax Cut Offsets Oil Impact

India Rupee Steady This Week As Corp Tax Cut Offsets Oil Impact

21 Sep 2019 03:33 PM
 

Weekly Synopsis

 

Indian Rupee

The Indian rupee was little changed against the dollar for the week as a corporate tax cut announced by the government boosted local shares, offsetting the impact of elevated crude oil prices. The rupee settled at 70.94 to a dollar, its highest since Sep. 13, against its previous close of 71.32. The unit opened at 71.20 and rose to a six-week high of 70.68, as India today cut the corporate tax on local companies to one of the lowest levels in Asia. It trades in a weekly range between 71.98 to 70.67 against the US Dollar.

India's foreign exchange reserves fell to $428.96 billion as of the week ended Sep. 13, from $429.61 billion at the end of the prior week, according to central bank data released today. The fall was mainly due to decrease in foreign currency assets, which fell to $396.80 billion from $397.21 billion in the previous week, the data showed. The Reserve Bank of India has been intervening in the foreign exchange market to curb the rupee’s volatility. The central bank has net bought $20.34 billion in January-July this year, as against a net sale of $6.28 billion in the corresponding period year ago.

India’s Corporate Tax Rate Cuts this move puts India’s corporate tax rate on par with Asian peers and could help realize India’s aspiration to benefit from the big, structural shift of manufacturing out of China. Today’s policy move comes against the backdrop of very pessimistic growth sentiment amongst market participants Fiscal loosening measures announced by Finance Minister Nirmala Sitharaman today are likely to provide a small boost to economic growth over the coming quarters, The effective corporate tax rate for local firms and new manufacturing companies will be 25.17% and 17.01%, including surcharge and cess.

India's annual wholesale price inflation in August was 1.08%, government data showed on Monday, remaining unchanged from the previous month. Last month, the annual wholesale price inflation was largely in line with a forecast of 1.04% by economists. Wholesale food prices in August rose 5.75% year-on-year, compared with a 4.54% rise a month earlier.

Global Market

The U.S. dollar rose against a basket of currencies on Friday, putting it on track for its first weekly increase in three, prompted by hopes of progress in U.S.-China trade talks and that the Federal Reserve would not lower rates aggressively. Sterling retreated from a two-month high versus the greenback after the Irish foreign minister said that London and the European Union were not yet close to a Brexit deal. The index that tracks the dollar against a basket of six major currencies was up 0.31% at 98.58. It was on course to gain 0.3% on the week.

U.S. industrial production and manufacturing output both rose by more than expected in August, bucking the trend of a global slowdown this year against the backdrop of the U.S.-China trade war. Industrial production rose 0.6% on the month, from an upwardly-revised drop of 0.1% in July. In year-on-year terms, growth slowed to 0.4% from 0.5%. Manufacturing output rose 0.5% after a drop of 0.4% in July. That's above forecasts for a 0.2% rise.

U.S. manufacturing output increased solidly in August, boosted by a surge in the production of machinery and other goods, but the outlook for factories remains weak amid rising headwinds from trade tensions and slowing global economies. The fairly upbeat report from the Federal Reserve on Tuesday came as officials from the U.S. central bank gathered for a two-day policy meeting. Fears that the drag from the trade war could spill over to the broader economy are expected to compel the Fed to cut interest rates, now in its 11th year, on track. The Fed lowered borrowing costs in July for the first time since 2008.

U.S. homebuilding surged to more than a 12-year high in August as both single- and multi-family housing construction accelerated, suggesting that lower mortgage rates were finally providing a boost to the struggling housing market. Commerce Department on Wednesday also showed permits for future home construction rose to levels last seen in 2007. Housing and manufacturing have been the weak spots in the economy, which is now in its 11th year of expansion, the longest in history.

U.S. mortgage applications were little changed on the week even as home borrowing costs jumped in step with a surge in bond yields during a selloff in the global fixed-income market. The Washington-based group's seasonally adjusted measure on mortgage activity dipped 0.1% to 569.5 in the week ended Sept. 13, with loan requests for home purchases rising for a third straight week. The average interest rate for 30-year fixed-rate mortgages.

The number of Americans filing applications for unemployment benefits increased less than expected last week, pointing to strong labor market conditions that should continue to support a moderately growing economy. Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 208,000 for the week ended Sept. 14, the Labor Department said on Thursday. Data for the prior week was revised to show 2,000 more applications received than previously reported.

The amount of U.S. commercial paper outstanding posted the biggest weekly decline since May in a sign of how turbulence in the repurchase agreement market this week spilled over to other areas of the money market. The short-term corporate debt, which companies use to finance inventories and payrolls, fell by $18.5 billion to $1.092 trillion in the week ended Sept. 18, its steepest one-week drop since the May 1 week. Adjusted for seasonal factors, total commercial paper dropped $22.2 billion to $1.094 trillion, the biggest decline since the week of Feb. 6.

President Donald Trump's barrage of tweets blasting the U.S. Federal Reserve appears to have been ignored by both Republicans and Democrats who largely see the central bank as neutral in its decision making. In more than a year of tweets to his nearly 65 million followers, Trump has blamed the Fed with sometimes personal attacks for squelching economic growth and the stock market, and tying his hands in trade negotiations with China.

The Bank of England left interest rates on hold on Thursday. as it awaits further clarity on Britain’s preparedness for exiting the EU. The BoE left its refinancing rate unchanged at 0.75%. If Brexit uncertainty persists, inflation will likely become weaker, the bank said in its statement. Staff forecasts expect inflation to remain below 2% target for the rest of this year. Officials also reiterated that reaction to no-deal Brexit would not be automatic.

British retail sales unexpectedly fell in August after shoppers bought less online than the month before, when an annual promotion by Amazon appeared to have encouraged them to splash out. The figures gave little obvious sign that either the possibility of a no-deal Brexit on Oct. 31 or a fall in sterling over the summer had dealt a visible blow to consumer spending, which has solidly supported British growth in recent years. Monthly retail sales volumes dipped by 0.2%.

Consumer prices in Britain rose last month at the slowest rate since December 2016, a pre-Brexit boost to the spending power of households who are also seeing the fastest wage growth in 11 years. Prices of goods and services paid by consumers rose at an annual rate of 1.7% in August after a 2.1% increase in July. The drop came despite a sharp fall in the value of sterling in August as the Brexit crisis escalated, although it took more than a year for inflation to peak after the pound's post-referendum depreciation of 2016. Sterling has rebounded this month.

Japan's exports slipped for a ninth straight month in August as international trade tensions ramped up risks for the world's third-largest economy, although the decline was slightly smaller than expected. The negative reading adds some pressure on the Bank of Japan to expand stimulus at its policy meeting on Thursday to prop up business sentiment and manufacturing activity, which have been hit by global economic weakness. Exports in August slumped 8.2% from a year earlier.

Germany's ZEW economic sentiment index, the first major confidence indicator of the month in Europe, rose to -22.5 in September from a seven-year low of 44.1 in August, amid signs of progress in the U.S. China trade dispute and the European Central Bank's monetary policy easing package last week. The reading is stronger than the -38.1 forecast by economists. It's important because the ZEW index is usually seen as a better indicator of turning points in the German economy than of its overall performance. The ZEW current conditions sub-index worsened to -19.9 from -13.5 in August.

Local Market

Indian shares notched their best day in more than a decade after the government announced deep cuts in corporate taxes to revive flagging growth in Asia's third-largest economy. Finance Minister Nirmala Sitharaman said the effective corporate tax rate would be lowered to around 25% from 30% and scrapped the minimum alternative tax for domestic companies. Both the broader NSE index and the benchmark BSE index closed 5.3% higher, finishing the week with gains of more than 1.5%.

After sharp cuts in corporate taxes Corporate earnings may see an almost 12% jump in the next quarter for full taxpaying companies due to the cut, and the markets can go up nearly 10%, adding that foreign investors would cheer these measures. The tax break is the latest in a raft of measures from the government to lift the economy after growth hit a six-year low in the April-June period, mainly dragged by a slump in private investment.

Oil was headed for its biggest weekly rise since June on Friday although gains on the day were modest as traders pared bullish bets ahead of the weekend and uncertainty over the United States’ next move on Iran after the Saudi attack. Both crude and the U.K. Brent benchmarks were up nearly 7% on the week amid worries that production by top oil exporter Saudi Arabia may not be as stable as stated by Riyadh after the Sept. 14 attack on its oil infrastructure. WTI was 0.05%, at $58.22 per barrel. U.K. Brent crude was flat at $64.40. For the week, WTI was headed for a gain of 6.5% and Brent nearly 7%.

Gold prices rose on Friday as investors drew in their horns at the end of a week that has ultimately done little to give the market any real sense of direction. Global central banks have done little to encourage new long positions this week, disappointing the hopes of some who were counting on a robust easing of monetary policy across the world between now and the end of the year. Gold futures for delivery on the Comex exchange were up 0.3% at $1,512.25 a troy ounce.