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India's Foreign Exchange Reserves saw a decline to 49,75,431 crores in the week ending July 21st, 2023, down from nearly 50,04,017 crores in the previous months.
The yield on the Indian 10-year government bond dropped to approximately 7.05%, reaching its lowest level in a month. This decline followed the global trend of falling bond yields, influenced by indications of decelerating inflation and growth in the United States.
Despite challenging external conditions, domestic economic indicators displayed resilience, leading to additional investments in Indian bonds, with net purchases of $1.1 billion in June.
RBI's Monetary Policy:
Amidst lingering inflationary pressures, there is speculation that the Reserve Bank of India (RBI) would refrain from cutting interest rates in the foreseeable future. Unfavorable weather conditions in Southeast Asia and apprehensions about El Nino contributed to the rise in food inflation during June, significantly impacting the Indian consumer basket.
Goods Trade Deficit:
India's goods trade deficit for June 2023 fell to USD 20.13 billion, down from USD 22.07 billion the previous year, roughly in line with market expectations of a USD 20.10 billion imbalance. The decrease in the trade deficit can be attributed to a 22.0 percent year-on-year decline in exports to USD 32.97 billion, the lowest level since October 2022, as external demand remained sluggish due to a recession in major world economies. Meanwhile, imports also decreased by 17.5% to USD 53.10 billion.
Indian Rupee's Performance:
The Indian rupee initially strengthened from a seven-week high of 82.75 per USD on July 6th. However, rising inflationary risks enhanced the case for the RBI to postpone rate reduction, impacting the currency's performance.
Retail inflation in India rose to 4.8% in June, up from a two-year low of 4.3% the previous month, exceeding market expectations of 4.5%. This increase was primarily driven by a sharp rise in food costs.
The Indian rupee benefited from significant foreign capital inflows, with recent data revealing that international investors purchased $6.7 billion in Indian stocks in June.
Various factors, including domestic and global macroeconomic statistics, the trend in global stock markets, monsoon development, the movement of the rupee versus the dollar, and crude oil prices, will all influence the market trend.