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Series of meetings planned from today to discuss measures to bolster growth

The Centre has not taken further steps on overseas sovereign bonds, says Nirmala Sitharaman. PTI

Finance Minister Nirmala Sitharaman will hold separate meetings with representatives of various sectors over the course of the week, following which the government will decide on the steps needed to bolster the economy, Finance Secretary Rajiv Kumar said on Monday.

The Minister held a review meeting with the heads of public sector banks (PSBs) on Monday.

This will be followed by a meeting with representatives of non-banking financial companies (NBFCs) on Tuesday, automobile sector on Wednesday, financial services sector on Thursday, and the real estate sector on August 11.

“We are getting inputs from various sectors and trying to respond so that confidence of those sectors is restored,” Ms. Sitharaman said in response to a question on whether she found the current economic environment worrying

Speaking to reporters following a meeting with the heads of PSBs, Ms. Sitharaman said that the government would decide on the way forward on the service tax demand from the banks after they replied to the notices sent to them.

Reply to notices

“Today in the meeting, where SBI chairman and Deputy Governor of the Reserve Bank of India were also present, we have asked the banks to reply to the notices issued by the tax authorities,” the Finance Minister said.

“They have agreed to this. Once the reply reaches us, the Revenue Secretary can take a look and we can take a call from there.”

The income tax department had issued notices to the banks to pay service tax amounting to a total of ₹38,000 crore on the penalties they imposed on customers for low balances in their accounts.

The banks had disputed this and approached the Delhi High Court for redressal.

Regarding the concerns of foreign portfolio investors (FPIs), she said Economic Affairs Secretary Atanu Chakraborty would soon hold a meeting with the FPIs.

Ms. Sitharaman also said that the government had not taken any further steps regarding the issuance of overseas sovereign bonds.

“There are some numbers floating around because the Secretary has said ‘this is the quantum,’ but not much more work has happened because we have been busy in the Ministry with the various Bills that have been passed,” the Finance Minister said.

J&K turmoil also roils markets

Equities lost heavily on Monday as investors remained jittery amid negative global trend, weak corporate earnings and the government’s decision to scrap special status for Jammu and Kashmir and bifurcate the State.

The decision on making J&K an union territory could lead to further political tensions, according to market participants.

The 30-share Sensex lost 418.38 points, or 1.13%, to close at 36,699.84. Earlier in the day, it lost more than 700 points to touch a low of 36,416.79. As many as 21 Sensex constituents lost ground with Kotak Mahindra Bank, Reliance Industries, Power Grid Corporation, Tata Motors and Yes Bank shedding between 3% and 9% each.

The broader Nifty lost 134.75 points or 1.23% to close at 10,862.60. Further, India VIX index, which is looked upon as a barometer of near-term volatility, surged almost 15% during the morning session, before closing with a gain of a little more than 9%. The global sell-off on account of escalating U.S.-China trade war dented investors’ confidence on Monday.

China imbroglio

With China suspending all agricultural imports from the U.S. and Yuan dropping to below 7 a dollar, there was major panic.

The news that the government had decided to scrap Article 370 granting special status to J&K while bifurcating the State also acted as a catalyst with market players of the view that the ensuing political turmoil could lead to heightened volatility.

“The Indian markets started the week on a negative note led by ongoing tensions in Kashmir and unsupportive global cues,” said Ajit Mishra, vice-president — research, Religare Broking.

“Further, the ongoing turmoil in Kashmir may induce volatility in the markets. On the global front, escalating trade tensions between U.S. and China will keep the market participants on the edge and cause volatility in oil prices as well as currency,” added Mr. Mishra. Meanwhile, provisional numbers showed that foreign investors were net sellers at ₹2,017 crore on Monday. Interestingly, market players feel that foreign investors could accelerate their selling if political tensions flare up in the country on account of the J&K development.

Elsewhere in Asia, indices such as Hang Seng, Kospi and Jakarta Composite all closed with a loss of over 2% over concerns emanating from the ongoing U.S.-China trade war with reports suggesting that China had asked State-owned entities to halt imports from the U.S.

Back home, over 1,700 stocks lost ground on BSE, against less than 700 gainers.

Indian currency ends at 70.73 a dollar

The rupee plummeted 1.6% on Monday — the highest in six years — after the Chinese Yuan tumbled to the weakest level in more than a decade, and the Jammu and Kashmir issue compounding it.

The rupee, which breached 70 a dollar on Monday, ended the day at a four-month low of 70.73 a dollar.

Market participants said the central bank intervened in the currency market to stem the depreciation. RBI has always maintained that it would intervene to curb volatility and does not target any levels.

“Since Friday, there was speculative buying since the market was heavily short after the U.S. imposed tariffs on China, which led to depreciation of all emerging market currencies. That spilled onto the rupee as well,” said Anindya Banerjee, currency strategist at Kotak Securities Ltd.

“Today morning, when China suspended all agricultural imports from the U.S., and Yuan dropped below 7 a dollar, it led to a major panic,” he added. At home, the government’s decision to scrap the special status accorded to J&K caused uncertainty among the investor community.

Dealers said the rupee could depreciate further to 71 a dollar.

If rupee continues to depreciate, it will put the Reserve Bank of India in a dilemma when it announces the review of monetary policy on Wednesday.

While the RBI may still go ahead with a rate cut on Wednesday, future policy action on interest rates could depend on the extent of rupee depreciation.

“RBI could ease [rates] by 50-75 bps in the current cycle, but is caught in a bind with rupee fall,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

‘Easing monetary policy may encourage riskier play by govt.’

Raghuram Rajan

Central banks are ‘fall guys’ and required to ease monetary policy to compensate for populist mistakes made by governments, according to former Reserve Bank of India (RBI) Governor Raghuram Rajan.

“A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem,” Mr. Rajan wrote in an article, without specifically mentioning India.

“Though the central bank is still autonomous, it effectively becomes a dependent follower.” In such cases, he added, such actions by the central banks could even encourage the government to implement riskier policies on the assumption that the former would bail out the economy whenever needed.

“Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver,” Mr. Rajan wrote.

“Such misunderstandings could be deeply problematic for the economy.”

‘Public attack’

The former RBI Governor added that central bankers “are not immune to public attack”, since they know that they are being set up to take the fall in case the economy falters.

“In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability,” Mr. Rajan said.

“This possibility, of course, will tend to depress market interest rates further rather than elevating them.”

In order to combat this, Mr. Rajan added, central bankers have to explain to the public what their role is and why it is more than “simply moving interest rates up or down on a whim”.

“Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run,” he said. “The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors.”

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