India is not immune but is relatively better placed amongst its Asian peers in the event of heightened tensions between China and the US, according to a DBS Bank economic research report. However, RBI’s easing cycle could be delayed.

Asia ex-China economies are likely to feel the heat from US election results, contingent on the degree of trade and investment linkages with both counterparties -- US and China, per the report.

Radhika Rao, Senior Economist - Executive Director (Group Research), DBS Bank, assessed that the first line of impact will be the pass-through of financial market volatility, with sharp swings in UST (US Treasury) yields as well as the dollar likely to pile pressure on the Indian assets/ flows.

While the relatively low beta of INR (Indian rupee) bonds to USD moves will shield part of the impact, the rupee has hit new lows in the past week on the back of the post-election USD rally.

Imported inflation

“With the CNY (Chinese Yuan) assuming the largest weight in India’s total trade basket, authorities are likely to align rupee’s movements to the yuan as well.

“Heightened market volatility might also lead the RBI to prioritise financial stability and guard against imported inflation, delaying its easing cycle,” Rao said.

On the real economy front, a hostile geopolitical environment, inward looking trade policies and consequent deceleration in global trade/ investment activity will impact Asia’s growth ambitions, per her assessment.

“India’s export and investment linkages run deeper with the US rather than China. The US is India’s largest goods and services export destination, followed by the EU.

“Census survey data by the RBI shows that the US continues to be the largest direct inward FDI investor into India. Notably, in President Trump’s first term, India lost its Generalised System of Preferences (GSP) status, under which certain product categories were exempt of tariffs. The status is yet to be restored,” Rao said.

With China, not only is India’s overall exports to GDP ratio (22% of GDP) lower than Asian peers but also the share of exports to China is low (4% of total exports). But the trade linkage is lopsided as India runs significant trade deficits with the North Asian country.

China: Risk factor

“Risk is if increased excess capacity from China is channeled to India, hurting private sector activity domestically. Tighter scrutiny on investments from China has also led to a sharp drop in direct FDI flows in the past five years.

“The bilateral trade deficit has widened by 4x vs 2010. Punitive tariffs by the US on purchases from China might lead to an increase in shipments into rest of the world, including India, exacerbating the bilateral trade imbalance,” warned Rao.

The DBS Bank Senior Economist noted that India is an important diplomatic and security bipartisan ally for the US in the region, including the leader-level Quad summits, U.S.-India 2+2 Ministerial Dialogue, US-India Defense partnership and the important U.S.-India Initiative on Critical and Emerging Technology. Any escalation in tensions with China is likely to strengthen these bilateral ties further. Labour movement and immigration will also receive attention, she added.

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