CAO The Hindu NOTES – 21st May, 2018 (Daily News Paper Current Affairs Analysis)

📰THE HINDU NEWSPAPER DAILY  Hindu Current Affairs Analysis

Date:- 21st May 2018


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Depreciating by more than 6% against the U.S. dollar since the beginning of 2018, the rupee now figures among the worst-performing Asian currencies.

We had a similar experience in 2013, hints from the U.S. Federal Reserve that it was planning to taper its bond-buying programme saw the rupee slide by more than 20% against the dollar in a mere three months from May to August.

So in this context let’s understand the current downfall of rupee using the framework of comparison between the 2013 and present crisis.


The main most common reason why the rupee is always on a sticky wicket is that India runs a persistent Current Account Deficit (CAD). That is, the net of its transaction towards import and export of goods and services, usually exceed its dollar earnings from exports.

The wider this CAD is, the more is the scramble for dollars in India, leading to a weaker rupee. This is why the absolute and relative levels of CAD are critical to judge whether the rupee is in hot waters. On both counts, India is better off today than it was in May 2013.

In 2013 it ran up a CAD of $87.8 billion for the full year. That translated into 4.8% of GDP, well above the comfort zone of 2.5%. Forecasters expect India to close FY18 with a CAD of $48-49 billion, just short of 2% of GDP, well below the alarming levels of FY13.

FOREX Reserve.

RBI held foreign currency assets of $396 billion (excluding gold) last week, which covered India’s monthly import bill about 10 times. In May 2013, RBI’s foreign currency assets had covered its monthly import bill by a precarious 6.5 times. So in this aspect also India’s record forex kitty also gives RBI enough ammunition to intervene if there is a speculative run on the rupee.

In 2018, oil prices, after staying at $30-$60 a barrel from 2015 to 2017, have just begun to simmer.  Crude prices have increased from $60 in January to over $71 in May. Various forecasters estimate that every $10 per barrel increase in crude oil prices can expand India’s CAD by 0.5% of GDP.

For now, India is expected to end FY19 with CAD at about $70 billion or about 2.5% of GDP, a significant deterioration from 0.7% in FY17. And hence this factor well could be a damper for the rupees prospects and hence oil prices will remain a to-watch factor to gauge the rupee’s direction.

Iffy foreign flows

The above analysis shows that the fundamental factors driving the rupee aren’t flashing red yet. But foreign investment flows can turn out to be the make-or-break variable.

When a country regularly ends up having a CAD, the gap has to be made up by foreign investors pumping in dollars, either by way of Foreign Direct Investments (FDI) or Foreign Portfolio Investments (FPI).

FDI has been flowing into India at a brisk pace in the last four year and this year will end with roughly twice the $22 billion FDI inflows seen in FY13. But then, FDI flows can be quite lumpy and political uncertainties, such as looming elections can certainly act as a dampener. Volatile FPI flows are even less reliable.

While the first five months of 2018 have seen these flows reverse completely, with FPIs pulling out $3 billion, May alone has seen FPIs withdraw $2.6 billion from India’s stock and bond markets. This was probably a key factor precipitating the rupee’s recent slide.

Looking ahead, only the most foolhardy soothsayers would try to predict whimsical FPI flows. But With declining competitiveness in Equity and Bond markets could prompt FPIs to pull away from Indian bonds. The strengthening dollar also prompts pullouts.


What muddies the FPI outlook further is India’s upcoming general elections next year. Political upheavals usually send foreign investors into fence-sitting mode.


In a retaliatory move, India has told the WTO that it proposes to raise duties by up to 100 per cent on 20 products such as almonds, apple and specific motorcycles imported from the US from next month, if Washington does not roll back high tariffs on certain steel and aluminum items.

An additional of from 5 per cent to 100 per cent would be hiked on these items. The country has proposed this move under the WTOs Agreement on Safeguards.

The 20 items include peas, chickpeas, fresh apple, walnut, soybean oil, refined palmolein, coco powder, chocolate products, golf car, Motor cycle with engine capacity over 800 cc and other goods vehicles, with spark-ignition internal combustion piston engine. The US has however stated that the duty hike by Trump administration is not a safeguard measure.

The decision come after, India had urged the US to exempt it from the decision to raise import duties on certain steel and aluminum products.


On March 9, US President Donald Trump had imposed heavy tariffs on imported steel and aluminum items, a move that has sparked fears of a global trade war. Trump had signed two proclamations that levied a 25 per cent tariff on steel and a 10 per cent tariff on aluminum imported from all countries except Canada and Mexico.

According to Indian America imposed definitive safeguard measures without giving affected members any opportunity for consultations.

India has dragged the US to the World Trade Organisations dispute settlement mechanism over the imposition of import duties on steel and aluminum.

The duty imposed by America has affected Indian steel exports by USD 134.4 million, while the same on aluminum was USD 31.16 million.


Two years after it was launched by the Union government, the Permanent Residency Status (PRS) scheme providing a host of facilities for foreigners is yet to find a single applicant.

Among foreign countries, the maximum investment proposals in critical sectors such as telecom and defence that was cleared by Home Ministry in 2017, were from China, the U.K., the U.S. and Mauritius.

What is permanent residency?

 Permanent residency refers to a person’s visa status, i.e. the person is allowed to reside indefinitely within a country of which he or she is not a citizen. A person with such status is known as a permanent resident

The permanent residency scheme

The Union Cabinet had cleared the PRS in 2016 to boost its “Make in India” policy.

  • The permanent residency scheme (PRS) will be granted for a period of 10 years with multiple entries.
  • To avail PRS, the foreign investor will have to invest a minimum of Rs.10 crore to be brought within 18 months or Rs.25 crore to be brought within 36 months.
  • The foreign investment should result in generating employment to at least 20 resident Indians every financial year.

Except Pakistani citizens or third-country nationals of Pakistani origin, the scheme is open for citizens of every country.

The PRS card holders are also eligible to buy residential property in India.

In other countries

Most European Union countries, the U.S., Canada and others offer permanent residency to foreign investors.

The U.S. offers the EB-5 visa programme where foreigners could apply for permanent residency if they created employment opportunities for 10 people with a minimum investment of Rs. 6.5 crore.


China has started “large-scale mining operations” in a remote Tibetan county bordering Arunachal Pradesh where a huge trove of gold, silver and other precious minerals valued at about $60 billion has been found.

The mine project is being undertaken in Lhunze County under Chinese control adjacent to the Indian border.

But since the mining operations are on the Chinese side of the border, they are unlikely to be objected to by India.

Strategic angle

Projecting the mining operations as part of China’s move to take over Arunachal Pradesh, the reports with inputs from China said “people familiar with the project say the mines are part of an ambitious plan by Beijing to reclaim South Tibet (Arunanchal Pradesh)”.

China claims 90,000 sq km in Arunachal Pradesh as theirs. Strategic scholars suspect that the long-term plan would be to replicate China’s salami slicing approach to the South China Sea, where it has now firmed up control over disputed islands and reefs through land-reclamation, even now operating runways and military facilities on artificially constructed islands.

The difference in this instance, however, is that India, which patrols up to its side of the border, is unlikely to allow the kind of Chinese activities that were met with no resistance in the South China Sea.


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