Scrapping of Section 370 had been on the agenda for a long time but it finally gained fruition on Monday after the Upper House passed the bill for reorganization of Jammu and Kashmir. In a swift move, the government scrapped Article 370 and Article 35A which gave special status to the state of Jammu and Kashmir. Under the new Reorganization Bill, the state of J&K would be bifurcated into 2 union territories. Jammu & Kashmir will now be a UT with its own legislature while the UT of Ladakh will not have a legislature. J&K now come entirely under the control of the Indian constitution.
After manufacturing, it is the turn of services sector to display greenshoots of recovery. PMI Services for July comes in much stronger at 53.8, indicating positive momentum. After positive cues from PMI manufacturing, the PMI services also flattered on the positive side at 53.8 as against just 49.6 in June. This sharp rise indicates a positive expansion with favorable momentum in services. The sharp surge in the PMI services was indicative of a surge in orders and also services output. Recruitment also picked up sharply in the services sector, underlining the sustainability of this recovery.
The Yuan tumble took its toll on global markets as Wall Street tumbled more than 500 points in early trades as the sharp fall in the Yuan led to panic in global markets. China let the Yuan slide beyond the CNY7/$ mark on Monday after Trump decided to impose 10% tariffs on Chinese imports to the tune of $300 billion. The move led to fears of a full-fledged currency war and impacted markets across the globe. US markets have been under pressure for the last few days due to overvaluation concerns and also due to worsening trade war situation with China and tensions in the Middle East.
Higher prices mean that Indians are buying less of the yellow metal. Indian gold imports plunged by 55% in July on higher gold prices. The sharply higher prices of gold globally is taking its toll on the Indian import scenario as July imports plunged by 55% to just 39.66 tonnes. Exactly a year ago, the imports stood at a whopping 88.16 tonnes of gold. In a way, this will be viewed positively as gold imports are unproductive use of foreign exchange and this will help to reduce the trade deficit and also the current account deficit and that should be positive for India’s external rating as well as the value of the rupee.
Indian rupee cracked by 1.63% on Monday to Rs.70.74/$ on Yuan worries. Monday was almost a repeat performance of 2015 when rupee had cracked in response to the falling Yuan. The sudden weakening of the Yuan was deliberate to ward off the ill effects of higher tariffs imposed by Trump. There was also pressure to hedge from Indian importers, borrowers and banks, which led to the rupee weakening further. Meanwhile, there is not too encouraging news on sovereign bonds that was supposed to ease the pressure on the rupee. The finance minister admitted that not much work had been done on sovereign bonds. While the FM had been enthusiastic about these bonds, the PMO had raised concerns over the currency risk. According to Bloomberg, government could look at phased funding.
Brent crude cracked by 2.5% and inched closer to the $60/bbl mark in Monday trades. After the 7% correction on Thursday, oil had shown some signs of a recovery on Friday. However, Monday started off on a weak note after China allowed the Yuan to weaken beyond the CNY7/$ mark. This led to fears of a currency war among EM currencies and a distinct slowdown in trade. These global growth worries led to a sharp crack in Brent crude prices on Monday and the weak demand trend is likely to continue. As of now the impact of the tensions in the Middle East is almost muted with growth taking precedence.
