#DHRecaps | Banking fraud, RBI exit in 2018

Last Updated 29 December 2018, 12:06 IST

2018 – the year that unfolded the biggest banking fraud in Indian history, saw a chain of events impacting economy while investors watched with trepidation the IL&FS default that triggered a crisis in NBFCs and chocked credit flow. But an abrupt resignation by Reserve Bank of India (RBI) Governor Urjit Patel, that capped the year, left India's financial system up for a rude shock.

Still not out of the woods after the draconian demonetisation and initial hiccups of GST reforms, India's economy slowed by more than a percentage point in the second quarter (July-September), though retained the tag of the world's fastest-growing major economy.

The 8.2% growth in India's gross domestic product (GDP) at the beginning of the financial year was reduced to 7.1% in the middle of the year with a muted prognosis for 2018-19. At the same time, the government entangled itself in criticism by producing a back series data that showed the UPA year economic growth lesser than that of the NDA.

Global headwinds that came in the form of the growth slowdown in major economies and trade war, were compounded by the US Federal Reserve finishing the year with a fourth rate hike. The consequent rise in US treasuries yield will only precipitate fund outflow from the Indian market, which has already been spooked by rupee fall, IL&FS crisis and an unpopular step the government took in the Union Budget this year.

The government imposed Long-term capital gains (LTCG) tax on equities that impacted flows by foreign institutional investors (FIIs). The flows, which were at a record high of over Rs 22,000 crore just before the Budget, saw half of them being withdrawn from the market soon after the Budget. FIIs, which poured nearly Rs 2 lakh crore in the Indian market in 2017, took out nearly half of it this year.

Strengthening US dollar and rising crude prices also impacted Indian currency, which fell to an all-time low of 74.48 to a dollar on October 11. In its attempt to defend the weak currency, the RBI lost its precious dollar reserves, which kept coming from a lifetime high of $426 billion in April this year.

Higher crude oil prices also increased concerns about India's trade and current account deficit widening and dealing a severe blow to the government ahead of 2019 elections.

However, things turned around at a rather fast pace than expected towards the end of the year. An unprecedented rise in US crude oil production and fears of global growth slowdown impacting demand for oil, put a lid on its prices. The rupee too strengthened.

But going forward, the outlook for the Indian currency does not look bright. The uncertainties ahead of 2019 parliamentary elections and investors flying back to the US market in quest of better returns are expected to keep the rupee in a near volatile mode.

Headline inflation is down at present but that of the core is not. As long as core (non- food and non-oil) inflation worries remain, rupee worry will also continue.

(Published 26 December 2018, 15:17 IST)

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