Critically discuss the likely impacts for India, if the trade war between U.S-China were to intensify. (200 words)
Refer – The Indian Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 8 years
KEY POINTS
How will India be impacted?
In the short run
· If the trade war were to intensify, there is a possibility of positive results for countries such as Brazil and India from a trade perspective.
· For instance, in case of soybean, one of the key items in the U.S.’s list, the bulk of China’s annual import is for domestic consumption; the rest is used in the manufacture of soybean oil and meal for export.
· If the levy hits China’s import, exports could be dented, a space that India could potentially fill to meet the demands from other countries.
In the long run (Indirect impact)
Impact on Interest rates and debt market
· Within the US domestic economy, higher tariffs on a range of imported products escalate the threat of higher consumer prices.
· This could force the Federal Reserve to frontload its interest rate glide path — raise rates faster than it would have done otherwise.
· An increase in interest rates in the US has implications for emerging economies such as India, both for the equity and debt markets.
· Generally, as bond prices increase, bond yields will fall and vice versa.
· Yields in US markets have been inching up since mid-2016. The Indian government securities market has been falling in recent times on cues of rising US yields and projections of increased local inflation.
· The yield on benchmark 10-year government bonds has risen from 6.5% to 7.86%.
· When yields rise, prices of bonds will fall, resulting in mark-to-market losses for PSBs.
· Indian banks, stressed by bad loans, may have to incur mark-to-market losses.
Impact on equity markets
· Higher US rates will lead to outflows from emerging market bonds and equities as American investors will look to chase higher returns in their home.
· While a surge in domestic inflows is a reassuring factor for Indian equities, higher interest rates do make the option of investors borrowing cheap money in the US and investing in Indian equities significantly less attractive.
