Secondwave,PowellandReserves

Asian stock markets like the Hang Seng, Kospi and Nikkei have opened in slight negative. After the roller coaster seen with the Dow Jones on Thursday and Friday, it is imperative that the markets will take few days of range bound action.

The news coming from mainland China has not been too encouraging as new cases in Beijing have forced the authorities to shut a wholesale food market down. Infection numbers, though small, point to the possibility of a second wave. The Chinese Yuan dipped in the offshore trade post the news. The PBOC has set the Yuan reference rate at 7.0902/$ today.

Among other important news this week would be the testimony of Jerome Powell in front of the law makers. He is expected to present an assessment of the economic impact of the virus on the economy which will be mostly in line with the Fed statement of last week. Mr Powell previously has spoken multiple times regarding the need of more fiscal action required by the law makers, he is expected to continue in the same vein.

Domestically, the rupee opened at 76.04 to trade currently at 75.95. Indian stock markets have opened in red trading close to 1.4% currently. One important news item which came out on Friday was the foreign exchange reserve for India. The reserve levels crossed 500 bn USD for first time in history. The sudden jump of 8 bn USD compared to the previous week was on account of RBI shoring up some large inflows related to big ticket FDI transactions. Now this reserve accumulation needs to be seen in a wider historical context.

In his book, The Dollar Trap, the IMF economist Eeswar Prasad writes about the constant need by developing economies to shore up reserves. He writes that this habit of accumulating more and more reserves were the result of the East Asian crisis where the regimes got toppled as the hot money left the shores in a hurry and the social and political consequences were high. Reserve accumulation also comes with a cost as the dollars which get bought result in supply of the domestic currency in the economy. The money supply can be inflationary and has to be sterilized through OMO’s. The bonds under OMO have to be paid the current yield which effectively is the cost of this entire operation. The US on other hand will keep issuing new treasury bills which will be subscribed by the central banks across the world. When Jerome Powell says that lawmakers need to be more benign he is mindful of the privilege which the US has. It can print and spend - no one else has that privilege.