USholiday,risingcrudeandglobalfinance

US markets are closed today on account of the Presidents Day celebrations. Also, the Chinese markets will continue to remain closed for the New Year celebrations. However, the closure doesn’t mean investors don’t get to express their views on US or Chinese assets. US Dollar, yields, offshore Yuan and stock futures continue to trade around the world. The hyper connected always-on nature of global finance quickly assimilates all the action happening in any part of the world into tradeable prices. There is hardly any hermit country which is not part of this global financial supply chain which manufactures yields and risks with equal panache.

Let’s try to have a look today at the strands which connect any particular economy to the wider world. We will also try to see it in the current Indian context. The first thread which connects any economy to the world is through the external flow accounts, it is also called BOP (Balance of Payments) colloquially. The stability and sustainability of the imports and exports impact currency, inflation and asset prices. In India the most important component of BOP is the crude import as more than 75% of the domestic demand is met through imports. The Brent crude prices are currently trading at 63$/bbl which is its highest in a year. With mobility restrictions easing and tensions in the ME region increasing this is one space which will impact Indian assets. The excise duty levied on crude first needs to be lowered resulting in a drop in government revenues, increasing the bond yields.

The second piece of the globalization puzzle refers to the stock accounts or the net international investment position of the country. Here the queries regarding the external debt (both sovereign and corporate), equity investments by the foreigners and the adequacy of foreign exchange reserves are answered. In India as per the WSS released last Friday the total foreign currency reserves for the week ending 5^th Feb 2021 stood at 583.9-bn USD.  On the foreign debt side, a statement last week by the MOS for Finance highlighted that the external debt of India is around 554-bn USD currently and with reserves hovering around 590-bn USD, India is a net creditor to the world. The absolute number of external debt is one thing but parameters like the duration, unhedged portion also are notable. With the annualised forward premia over 5% the hedging cost has moved up in recent times.