Anindya Banerjee Currency Derivatives Researcher, Kotak Securities
While replying to a comment from Thomas Piketty on how little taxes Indians pay, Bibek Debroy had remarked, “Indians pay one of highest tax rates in world, only problem is bulk of those taxes are private in nature, and move around as bribe and extortion money. Government gets a smaller share as official taxes." An apt remark we must say. However, it also outlines the job in front of GOI. It is to lower corruption and bring larger share of Black economy under the lens of tax authority. We are indeed seeing progress on that front. Yes, it will extract a hefty price from growth and employment creation over the short to medium term, but if handled smartly, it can reboot Indian economy over the long run.
Indian Rupee continues to exhibit low volatility against the US Dollar, as inflows from FPIs and demand for reserve funds from RBI continue flank the prices. Over the past week there some instances of state run banks selling dollars, but that could be part of Rupee liquidity management operation of RBI. We see little possibility of Rupee trading below 66:70/80 against the US Dollar over the next 4-6 weeks. Upside in USDINR remains capped by the technical resistance around 67:30 zone, which when consumed, can create opportunity for 67:70/80 levels.
Next week is going to be an eventful one. Two major central banks, Bank of England and Bank of Japan are scheduled to deliver their monetary policy. US economic data has improved over the past one month. Last week, housing starts came in strong. US Job market is still holding strong, though some deceleration is witnessed in the trend growth, which is natural after 7 years of acceleration.
Next week, we also have to keep an eye on the Bank of Japan monetary policy. Market expects a combined stimulus from Bank of Japan and the Japanese government. We anticipate a fiscal stimulus between 25 to 30 trillion Yen with an expanded QE from BoJ. Such a move can be negative for Yen, which in turn will be positive for emerging market equities and bonds. Nevertheless, if BoJ-MoF disappoints, then we can see a sharp reversal in Yen towards 100 against the US Dollar and an adverse impact on global risky assets.