The spread of the Pandemic has devasted India. The first wave seemed to slide by relatively quickly, creating an environment where caution was thrown into the wind. In the wake of the campaigning ahead of state elections, the second wave reared its ugly head, and it has yet to abate. India is under pressure, and hospitals are turning people away. Oxygen is in very short supply, and the rollout of the vaccine appears to be minimal. The central bank is attempting some monetary policy stimulus, and the government is stating they plan fiscal stimulus, which should weigh on the Rupee. India is between a rock and a hard place. They need a stable currency to keep imported products less expensive. At the same time, they want their exports to be more competitive globally.
What is Happening with Covid-19 in India?
India is experiencing a second wave like no other country around the globe. The deadly struggle continues unabated, with the country reporting another record rise in coronavirus cases over the past 24 hours. To date, the government has recorded more than 21.4 million confirmed infections and at least 234,083 deaths. The Indian healthcare system is on the verge of collapse, according to reports. There is concern amongst officials that crucial supplies are being held up at airports and delayed in reaching hospitals.
The spread of the second wave of the virus in India has been entangled with an election. This campaign looks pretty familiar. A third wave of the virus raised its ugly head around the time of the U.S. Presidential election. One side of the aisle ignored the deadly virus, while the other side preached the need to be prudent. India’s prominent opposition leader Rahul Gandhi warned that unless the second COVID-19 wave were brought under control, it would decimate India and threaten the rest of the world.
According to the World Health Organization, India accounted for 46% of new Covid cases globally in the first week of May. Additionally, 25% of the COVID-related deaths in that same week from India, the UN health agency said. India has reported more than 300,000 new cases daily in the last week of April and the first week of May 2021 and overtook Brazil in April to become the second-worst infected country globally. There is also some concern that the India data is unreported. Another issue that could occur is the creation of variants. Prolonged large outbreaks in any country could increase the possibility of new variants of Covid-19. Some of the variants could evade immune responses triggered by vaccines and previous infections.
How has the Pandemic impacted India’s Trade and Economy?
India announced its first nationwide lockdown in March 2020, which led to the economic slowdown. Consequently, international trade tumbled. By December 2020, imported commodities, specifically crude petroleum and other products, faced a more than 27% percent decline compared to the previous year. India’s economy may contract in the Q1 as Covid-19 cases surge, but the country could recover in Q2. The International Monetary Fund reports that it expects India’s economy to grow 12.5% in the fiscal year ending March 2022, after shrinking 8% in the prior fiscal year.
The Reserve Bank of India Leaves Rates Unchanged
Despite the devastation, rates remain stable. The Indian Monetary Policy Committee (MPC) met in early April 2021 and remained unchanged at 4%. It also unanimously decided to continue with the accommodative stance while ensuring that inflation remains within the target in the future. The Indian government, for the size of its economy, has done little to propel growth. The government in May 202 announced a $266 billion stimulus package to boost consumer demand and manufacturing. A large part of the package was loans provided by banks. This scenario comes in the middle of one of the worst quarters on record. India’s economy contracted by 23.9% in the April-June quarter of 2020.
The Bottom Line
Despite the lack of growth and stimulus in India, the Rupee has performed well relative to some major currencies. It has dropped approximately 10% against the Euro and is nearly unchanged versus the U.S. dollar. The substantial gains it has seen versus the dollar are due to the stimulus in the United States, which has interest rates at zero and a very robust bond purchase program geared to drive up employment. The U.S. has dropped interest rates, but long-term rates remain well above the zero marks. This situation compares to Eurozone long-term yields, which are still close to negative territory. The upshot is that India needs to get its COVID-19 condition under control, which will help buoy its economic growth and help stabilize the volatility that it is experiencing in the capital markets.
