Calls for RBI intervention grow on tariff fears

The evolving situation with the trade spat between India and the US is putting the spotlight on the Reserve Bank of India to step in and help the economy. This is happening because Indian businesses that export goods to America -- they are our biggest export market -- are being hurt by high taxes (tariffs) levied by the Trump administration, and banks are worried about how that might impact domestic bond prices.

Why now?

Normally, when the market is in trouble, the RBI steps in. Earlier this year, they bought a lot of bonds to help drive credit growth. However, recently, even though government bond yields (let's just say interest rates) went up a lot in August, the central bank did not do anything noteworthy. Experts of course, are unsure if the RBI should intervene, as different governors have differing ideas about whether to, and when to act. The current governor seems to be taking a more relaxed approach, especially with the rupee.

What's the risk with tariffs?

The US has put a 50% tax on Indian exports, which is causing worries about India's ability to compete in trade, job losses, and overall economic growth. Like we said in an earlier blog post, this levy could reduce India's economic output by 0.5% to 0.6% this year. The Indian government has already cut taxes to spur spending (GST 2.0, anyone?) and is planning more help for exporters. But these actions are making people worried about the government's finances, especially since tax collections are slowing down. Bond yields went up significantly in August, and banks are asking the RBI to reduce the number of long-term bonds because there is little demand from insurance companies and pension funds.

What is the Rupee angle?

Allowing the rupee to weaken can help exporters deal with US tariffs, a strategy that China has used before. The rupee has already dropped about 3% against the dollar this year, making it the worst-performing currency in Asia. Some believe it's now fairly valued or even a bit undervalued. But a weaker rupee is the only immediate solution for high tariffs. Exporters have also asked the RBI to let them convert their US earnings at better exchange rates (at a higher value against the dollar).

Should it be an all-clear for the central bank?

Not everyone thinks they should intervene. Some believe that helping the bond market now could be seen as a mistake, especially if prices start to rise again.