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The Week That Was:

From: Vartaa Editorial Team on Jun 27, 2016

India's NSG bid fails

India's renewed diplomatic efforts and PM Modi's personal push were not enough to convince NSG members to admit India into the elite club. At its Seoul plenary this past week, the group remained divided on whether those countries (like India and Pakistan) that have not signed the Nuclear Non-Proliferation Treaty (NPT) should be admitted into the group. Major nations such as Brazil, Austria, New Zealand and Mexico opposed extending concessions to India. This was of course, in addition to China's steadfast opposition to India's entry. The move came as a disappointment in India's security circles and led to criticism of the NDA government both from internal BJP members and the opposition. The MEA meanwhile was confident that this hurdle would eventually be surpassed when the NSG meets again later this year to discuss again the question of giving membership to non-NPT signatories. There was some reason for the government to cheer though as India's membership, along with that of Pakistan, to the Shanghai Co-Operation Organization, a six-member group of China and other central Asian countries, was approved.

Brexit and India

As Britain formally voted to leave the European Union this past week after a closely contested referendum, there were many wondering what impact this might have on India. Chief Economic Adviser to the government, Arvind Subramanium, was quick to assure investors that the impact on India will be limited while outgoing RBI governor, Raghuram Rajan also calmed any potential fears by stating that the RBI has tools ready to deal with the turmoil that is expected to come in the financial markets as a result of Brexit.

Subramanium Swamy on a tirade

Maverick BJP MP Subramanium Swamy has now trained his guns in-house and this week went after both the Chief Economic Advisor Arvind Subramanium as well as his boss Finance Minister Arun Jaitley. The attack on Mr.Jaitley did not go down too well within the BJP. The party was left red faced and left wondering how to control Swamy, a new MP who has 6 years in Rajya Sabha tenure to carry on his public tirade against prominent figures.

Jumbo is back

The BCCI this week appointed Anil Kumble as the new Head Coach of the Indian cricket team. Kumble was selected by a panel consisting of Sachin Tendulkar, Sourav Ganguly and VVS Laxman. His selection came after more than 50 candidates had applied for the post and surprised many experts who were expecting the BCCI to continue with Ravi Shashtri who had been the Team Director for the last 18 months.

Opinions you must read:

  • The Economic Times looks back at the 1991 economic reforms and its architect former PM Narisimha Rao's role in them and asks why the Congress party has abandoned its ex-leader.
  • Manas Chakarvarty writes in Mint who the Brexit vote was a case of Xenophobia trumping economics.
  • The Mint examines whether the NDA government's big bet on the FDI reforms will pay-off.

Chart of the Week

Last week we looked at the effect of RBI's rate controls on inflation during Mr Rajans tenure. Rajan's monetary policies did help in bringing down inflation, but there has been criticism about RBI being late in late in cutting interest rates for the entire 2014 year while inflation was low.

This week we will look at foreign exchange and gold reserves maintained by RBI and the value of Rupee as opposed to the Dollar. On the left axis we have total foreign currency assets, gold held by RBI alongwith total notes issued in market (including notes with public and held by banks) and Special Draw Rights (SDR , explained shortly) in billion rupees. On the right axis we have INR-USD spot rate(the trading price). Foreign currency assets and gold reserves held by the RBI help in regulating the currency price. Here's a speech from ex-RBI chief Dr YV Reddy on the importance of Forex Reserves.

While Forex reserves have increased gradually, Gold reserves have been maintained at level. This did facilitate in Rupee strenthening in early 2014. However despite increasing reserves rupee kept falling until Feb 2016. This is when the RBI dug into Special Draw Rights with the IMF arresting the rupee plunge. Every country's central bank (RBI for India) has to maintain certain amount of foreign exchange assets with the International Monetary Fund(IMF). Here's more on what SDR means. Since Feb 2016 the Rupee value has recovered but at the cost of slightly lower foreign exchange reserves.

Although Mr Rajan has initiated other reforms like conducting audits with banks regarding their non-performing assets and incentivising mobile transactions his successor will have an equally important role to play in meeting current financial challanges and following through with reforms.