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The cable has dropped below 1.29, hitting the lowest levels since November amid Brexit concerns and USD strength. Speculation about EU-UK relations and coronavirus headlines are set to move the pound, according to FXStreet’s Yohay Elam.

Key quotes

“The bloc could reportedly try to move the clearing of euro contracts from London to within the EU and may also move to withdraw concessionOfficial negotiations will kick off on March 3, but press briefings and leaks suggest talks will be tough.”

“The US dollar remains underpinned by upbeat figures such as the Non-Farm Payrolls report which showed an increase of 225,000 jobs in January.”

“Coronavirus headlines are also benefitting the greenback, which benefits from safe-haven flows. The respiratory disease has taken the lives of over 900 people with over 40,000 infected, the vast majority in China.” 

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The moderation in India's growth coincides with a deceleration in growth of global output and the IMF has projected the country's GDP growth to pick up to 5.8 per cent in 2020, Union Minister Anurag Thakur said in Lok Sabha.

Thakur said India's growth trajectory over the period 2014-15 to 2018-19 is characterised by macroeconomic stability with real GDP growth averaging 7.4 per cent.

"The moderation in India's growth coincides with a deceleration in growth of global output, as estimated by the IMF, in recent years," he said replying a question of Congress MP Abdul Khaleque and TMC's Saugata Roy during Question Hour.

Thakur, union minister of state for finance, said the IMF has projected India's GDP growth to pick up to 5.8 per cent in 2020.

The economic survey 2019-20 has also projected a pick-up in India's growth in the range of 6.0 per cent to 6.5 per cent in 2020-21.

The RBI's sixth bi-monthly monetary policy statement, 2019-20 has also projected GDP growth of 6.0 per cent for 2020-21.

Thakur said as per the National Statistical Office's first advance estimates of national income, 2019-20, India's real GDP is estimated to grow at 5.0 per cent in 2019-20.

He said the World Economic Outlook Update (January 2020) published by the International Monetary Fund (IMF) has revised India's GDP growth rate to 4.8 per cent in 2019.

This revision in growth may not cause any stress in the Non-Banking Financial Companies (NBFCs) sector as NBFCs are well capitalised, he said.

The minister said the government has implemented several major structural reforms in recent years to bolster investment and growth.

These include Insolvency and Bankruptcy Code (IBC) to strengthen the financial system, Goods and Services Tax (GST) to simplify the indirect taxation regime, Make-in-India programme to boost domestic manufacturing capacity, liberalisation of Foreign Direct Investment (FDI) and Jan Dhan-Aadhaar-Mobile (JAM) Trinity towards greater transparency, efficiency and financial inclusion, he said.

Thakur also said recently, the corporate tax rate has been cut to 15 per cent for new domestic manufacturing companies, which is amongst the lowest in the world.

In December 2019, he said, the government has announced the Rs 103 lakh crore National Infrastructure Pipeline which would significantly boost infrastructure and spur growth impulses in the economy.

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GBP/USD Exchange Rate Steady ahead of UK GDP Figures

The Pound US Dollar (GBP/USD) exchange rate is holding its ground at the start of this week’s session as markets brace for publication of the UK’s latest GDP estimate.

At the time of writing the GBP/USD exchange rate is trading at around $1.2928, virtually unchanged from today’s opening rate.

Pound (GBP) to Slump as UK Growth Stagnates?

The Pound (GBP) looks poised to slump on Tuesday as the UK publishes its latest GDP figures.

Barring a significant uptick in economic activity in December, tomorrow’s estimate of GDP is expected to show that the UK economy stalled in the last quarter of 2019.

The likely stagnation of growth comes amid heightened political uncertainty in the UK in the run up to December’s general election.

Should growth have stalled in line with expectations in the fourth quarter, it’s also likely to keep the pressure on the Bank of England (BoE) to ease it monetary policy in the near-term, potentially opening the door to an interest rate cut in March.

Coronavirus Fears to Underpin Demand for the US Dollar (USD)?

Meanwhile, the US Dollar (USD) looks likely to remain well supported this week as markets continue to panic over the coronavirus outbreak in China.

While reports of new cases are beginning to slow, the global death toll has now risen to over 900 topping that of the Sars outbreak in 2003, which was estimated to have cost the global economy over $30bn.

Economists predict that the impact of the coronavirus outbreak on global growth will be significantly more serve due to China’s greater role in global trade, but it remains unclear just how large an impact this will be.

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Stocks slipped across the Asia Pacific on Monday as investors continued trying to gauge when economic activity might rebound after the hit from the coronavirus.

Benchmarks in Hong Kong, Shanghai, Tokyo and Seoul were lower, though moves eased following a report that Apple Inc (NASDAQ:AAPL).’s main manufacturer got a green light to resume some production. That reversed declines in U.S. equity futures, which traded slightly higher as of noon in Tokyo. The Australian dollar climbed and the yuan rose past 7 per dollar offshore. Treasuries were flat, while oil traded around $50 a barrel in New York.

With cases outside of China continuing to increase, investors will be monitoring whether the rate of change kicks up a gear. Meantime, monetary authorities across emerging markets have stepped in. The People’s Bank of China moved to keep liquidity ample Monday through reverse-repurchase agreements.

“This coronavirus seems to be going on for longer, is infecting more people and the hit to growth will be longer,” Diana Mousina, an economist at AMP Capital Investors Ltd., told Bloomberg TV in Sydney. “You won’t be able to recoup all of the negative impacts in the first quarter.”

Here are some key events coming up:

• Earnings season continues with reports including: Alibaba (NYSE:BABA), Softbank, Nissan, Airbus, Nestle and AIG (NYSE:AIG).
• Federal Reserve Chairman Jerome Powell delivers his semiannual testimony in Congress on Tuesday and Wednesday.
• Thursday brings a gauge of underlying U.S. inflation, the core consumer price index. It’s expected to increase to 0.2% in January, a faster pace than in December.
• China and the U.S. on Friday lower tariffs on billions of dollars of respective imports, as part of the trade deal signed last month.

And these are the main moves in markets:

Stocks

• Japan’s Topix index dropped 0.6%. as of 12:35 p.m. in Tokyo.
• The Shanghai Composite Index slid 0.4%
• Hong Kong’s Hang Seng Index declined 0.7%.
• Futures on the S&P 500 were up 0.1%. The underlying gauge fell 0.5% on Friday.
• South Korea’s Kospi index retreated 0.6%.
• Euro Stoxx 50 futures slid 0.1%.

Currencies

• The yen was little changed at 109.80 per dollar.
• The offshore yuan ticked up 0.2% to 6.9952 per dollar.
• The euro bought $1.0951, little changed.
• The Australian dollar gained 0.4% to 66.97 U.S. cents.

Bonds

• The yield on 10-year Treasuries was steady at 1.59%.
• Australia’s 10-year yield declined two basis points to 1.02%.

Commodities

• West Texas Intermediate crude oil fell 0.2% to $50.22 a barrel.
• Gold was little changed at $1,570.41 an ounce.

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Insurance companies largely remained passive investors. But, in a welcome move, the Insurance Regulatory and Development Authority of India (IRDAI) has finally nudged a behavioural change.

The regulator has demanded that insurers keep a close eye on their investee firms and disclose this publicly. After all, it is policyholder’s money that is being invested in these companies.

It said that while insurers can determine their own engagement strategy, the stewardship policy should clearly set out the criteria/circumstances in which they will actively intervene. The regulator also said that the policy should provide for regular assessment of the outcomes of intervention by the insurer.

Stewardship refers to a set of best practices which insurance companies need to follow. IRDAI has now offered a fresh set of these examples to point out what insurers are required to do.

"Intervention should be considered regardless of whether an active or passive investment policy is followed," IRDAI said. This is a crucial development and puts the onus on the insurer to ensure that investee firms’ maintain proper financial health and sound corporate governance.

It has been predominantly noticed that insurers abstain from voting on crucial matters in investee firms. In a few cases, smaller insurers blindly followed the voting decisions of their larger counterparts. Considering that policyholder funds are being used to invest, it is pertinent that independent calls regarding board matters are taken by each insurer.

For voting, IRDAI has made the policy more concrete to ensure that insurers do not sit back and let companies make wrong business decisions.

For insurers with assets up to Rs 2.5 lakh crore, if the insurer’s stake is 3 percent or above in a company they have to compulsorily vote. For those with assets above Rs 2.5 lakh crore, the mandatory voting threshold is 5 percent or above.

When investee companies fail, policyholder funds are impacted. A wrong business decision or a corporate governance lapse in these firms would create a negative impact on the stock price. This, in turn, hurts the investment income of insurers.

Early signals of possible defaults or distress are available to insurers in such investee companies. Thus, rather than waiting for an entity to go to bankrupt, insurers could play an active role in questioning the action of such companies.

IRDAI has made it clear that the policyholder is the ‘ultimate investor’. Hence, all decisions taken in investee firms by insurers will now have to be periodically disclosed publicly. The regulator also said that this should be in a simple format that can be understood by the general public.

There have also been cases where large insurers cross-invest in sister entities. IRDAI has said that potential conflict of interest scenarios also need to be disclosed by insurers. It said that a blanket ban on certain investments could also be considered.

For large corporates with legacy brand-names, it has often been noticed that the insurer sides with the investee firm management on strategic business decisions. This is despite minority shareholders and proxy advisory firms opposing such a move.

In such cases, insurers need to apply rational thought to their voting decision and not blindly support the top leadership.

Insurers have been forced to take these steps in order to bring more transparency in the sector and protect policyholder interests. As a policyholder, individuals also need to seek and verify the investment decisions of their insurance company on a periodic basis.

In fact, policyholders do and should exercise tremendous control over these decisions.

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The insurance regulator is keen that Life Insurance Corporation of India (LIC) pare down its stake in other companies to 15 percent or below. But this reduction has to be gradual, Insurance Regulatory and Development Authority of India (IRDAI) Chairman Subhash Chandra Khuntia said.

"We would like LIC to bring down their stake in firms to below 15 percent. But this cannot happen before the (proposed) IPO. The reduction cannot be instant because it will lead to disruption and prices may get impacted. We will be fixing a timeline," he said on the sidelines of a National Insurance Academy event.

Finance Minister Nirmala Sitharaman announced on February 1 in her Budget 2020 speech that the government will divest its stake in LIC through an IPO. It is likely that LIC will be listed on the stock exchanges in the second half of FY21.

LIC holds more than 15 percent stake in entities like IDBI Bank, ITC and UTI. As per insurance rules, an insurance company cannot hold more than 15 percent stake in any company. However, LIC has been given special exemption for investing in IDBI Bank.

Once the Parliament gives nod for an IPO, the stake sale by the government will be undertaken. It is likely that the government could sell 10 percent stake in LIC, an insurer whose valuation could be as high as Rs 10 lakh crore.

New tax slabs

Khuntia also spoke about the Budget 2020 proposal on the new optional tax slabs that offer lower tax rates but without any tax exemptions or deductions.

"Even if there is a new tax regime I am sure people understand the need for protection. Those who need it will opt for insurance products. But it is a fact that people don't just buy insurance for tax exemption. There is a still an option," added Khuntia.

Capital infusion in PSU insurers

When it comes to the public sector general insurance companies, Budget 2020 has provided for additional capital of Rs 6,950 crore for Oriental Insurance, United India Insurance and National Insurance.

The budget documents showed that the provision was for the higher requirement of maintaining the requisite minimum solvency ratio by each of the three public sector general insurance companies.

"A total of about Rs 9,500 crore has been provided. This year (FY20) there was a provision of Rs 2,500 crore capital. The same for FY21 will be Rs 6,950 crore," Khuntia added.

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The zero customs duty on open-cells for LCD/LED panels used for televisions may get a temporary extension. The government is studying a proposal to extend the nil duty by another six months. Currently, this is valid till September 30.

Imposition of customs duty would lead to an immediate hike in prices of televisions. This is because open cell is what makes the LED/LED screen of a television function effectively. The entire open-cell component is imported from South-East Asian markets.

LED TVs comprise one of the largest segments under the entire domain of Appliance and Consumer Electronics, accounting to a volume of almost 15 million with an estimated sale value of almost Rs. 40,000 crore.

"While the emphasis is on Make in India, the government is cognisant of the fact that key components for products like televisions do not have local manufacturing capacity," said an official.

In September 2019, the Ministry of Finance had said the open-cells for LCD/LED panels will not attract any customs duty. The ministry had said that it will be valid till September 30, 2020 post which local manufacturing of open cell could be incentivised.

In her Budget speech, Finance Minister Nirmala Sitharaman said that it has been observed that imports under Free Trade Agreements

(FTAs) are on the rise.

"Undue claims of FTA benefits have posed threat to domestic industry. Such imports require stringent checks. In this context, suitable provisions are being incorporated in the Customs Act. In the coming months we shall review Rules of Origin requirements, particularly for certain sensitive items, so as ensure that FTAs are aligned to the conscious direction of our policy," she had said.

It is to be noted that televisions are also a category where FTAs are being used in a small way to source products/parts from outside. This will also be under review.

She also said that the custom duty exemptions shall be comprehensively reviewed by September, 2020 for taking a view on their relevance.

Currently, the zero customs duty is applicable for open-cell (15.6 inches and above) used in the manufacture of Liquid Crystal Display (LCD) and Light Emitting Diode (LED) TV panels. Further, components like the chip on film, printed circuit board assembly and cell used in LCD/LED TV panels will also be exempt from customs duty.

Open-cell is a critical component used in manufacturing television sets. At present, there is no local manufacturing of open cell in India so a higher customs duty meant that TV prices stayed high.

The LED TV industry is also one of the biggest employers with estimated employment of 50,000 people directly and many more indirectly through the ancillary units.

The industry has sought a policy to enable phased manufacturing of TVs and end-to-end manufacturing of televisions in the country.

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The proposed levy of 1 per cent TDS on e-commerce transactions announced in the recent Budget may seem like a harmless 'papercut' but could impact working capital of small businesses, Amit Agarwal, country head of Amazon India and Chairman of industry body IAMAI said on Wednesday.

Agarwal said the focus for India should be on "removing friction and bottlenecks" and added that the target of USD 1 trillion digital economy is not far fetched for a country that is seen as a digital powerhouse.

"Just look at the most recent Budget. There is an introduction of tax collection at source. These seem like harmless papercuts but really impact the working capital of small businesses," Agarwal said.

A lot can be achieved by focusing on removing friction, he said expressing hope that there will be more attention in enabling this space for successful entrepreneurs.

Agarwal was speaking at 14th India Digital Summit organised by Internet and Mobile Association of India (IAMAI).

Agarwal further advocated a razor sharp focus on skilling, grassroot entrepreneurship, driving equal opportunity through greater women's participation as well as Artificial Intelligence backed solutions, and said a multi pronged approach can enable India to meet its target of USD 5 trillion economy.

He exuded confidence that bold reforms of last few years and India's rising tech clout globally backed by success of Aadhaar, UPI and other initiatives will help the country scale new highs.

The Union Budget announced on February 1 has proposed a new levy of 1 per cent TDS (tax deducted at source) on e-commerce transactions, a move that could increase burden on sellers on such platforms.

"In order to widen and deepen the tax net by bringing participants of e-commerce (sellers) within tax net, it is proposed to insert a new section 194-O in the Act so as to provide for a new levy of TDS at the rate of one per cent," according to Budget 2020-21 documents.

The amendments will take effect from April 1, 2020. The documents said the e-commerce operator -- an entity owning, operating or managing the digital platform -- will have to deduct 1 per cent TDS on the gross amount of sales or service or both.

This provision will not apply in cases where the seller's gross amount of sales during the previous year through e-commerce operator is less than Rs 5 lakh and the seller has furnished his PAN or Aadhaar number.

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The Chinese yuan benefited from the stronger tone in the country’s equity markets Tuesday, although concerns about the widening coronavirus outbreak have kept the gains capped.

At 03:05 ET (0805 GMT), USD/CNY traded at 6.9935, down 0.4%, pushing back below the 7.0 level after breaking through that barrier Monday for the first time this year.

The country's central bank has tried to mitigate the economic damage caused by the coronavirus by trimming interest rates and injecting 1.2 trillion yuan of liquidity into the markets.

Most expect more measures ahead.

"Chinese authorities have been providing a lot of support for the financial markets. There's a level of assurance that the rout would not be allowed to go on much further than necessary," said Christy Tan, head of markets strategy for Asia at National Australia Bank in Singapore.

Still, the number of coronavirus deaths in China continued to climb, reaching 425 as of the end of Monday, from over 20,000 cases, a mortality rate of barely 2%.

Elsewhere, the US Dollar Index Futures, which tracks the greenback against a basket of other currencies, pushed up 0.2% to 97.767, helped by stronger than expected manufacturing sentiment data late Monday and weakness in sterling.

“The ISM manufacturing index has surged back into positive growth territory. The Phase One trade deal between the US and China has lifted much of the gloom hanging over the sector with businesses responding positively,” said ING, in a research note.

Sterling was weak Tuesday as Prime Minister Boris Johnson and Chief EU Negotiator Michel Barnier laid out opposing visions for the relationship between the two groups post-Brexit.

Fears still exist that the U.K. could end the transition period at the end of this year without a trade deal.

At 03:05 ET (0805 GMT), GBP/USD traded at 1.2957, down 0.3%, near a seven-week low.

Overnight, the Australian dollar rose after the Reserve Bank of Australia decided to hold the official cash rate steady at 0.75%. The decision was largely in line with expectation, but analysts do look for another rate cut in the near future.

At 03:05 ET (0805 GMT), the AUD/USD pair traded 0.4% higher to 0.6717.

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The dollar held firm on Tuesday after a key U.S. manufacturing survey showed a surprise recovery, while concerns about a widening coronavirus outbreak in China kept the yuan and the Australian dollar subdued.

The dollar index (=USD) rose 0.44% on Monday, the biggest gain so far this year, and last stood at 97.802. It was boosted by a report from the Institute for Supply Management (ISM) reported that U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders.

Against the yen, the dollar traded at 108.62 yen , after a gain of 0.3% on Monday, the biggest gain in a downtrend that started in mid-January.

The euro stood at $1.1062 (EUR=), having slipped 0.3% on Monday.

In Asia, coronavirus remained in focus as the number of cases and deaths showed little sign of slowdown.

"The question is how long it will take to contain the epidemic. While some people are selling risk assets, there are also lots of people who are looking for a chance for bargain-hunting," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

"If we start to see a decline in the number of new cases, then we could see an end. But at the moment, it is hard to say when that will happen."

The offshore yuan traded at 7.0127 yuan per dollar , holding slightly above its one-month low of 7.0230 per dollar hit in European trade on Monday.

The Australian dollar fetched $0.6690 , within sight of its 10 1/2-year low of $0.6670 touched last October, ahead of an interest rate decision Reserve Bank of Australia (RBA) due later in the day.

Although most investors expect the RBA to keep rates on hold at this month's meeting, a cut has not been completely ruled out, with markets pricing in a 100% chance of such a move by May.

Elsewhere, sterling fetched $1.2999 , having lost 1.54% on Monday on renewed worries about Britain's relations with the European Union. Prime Minister Boris Johnson set out tough terms for Brexit talks with the European Union, rekindling fears Britain would reach the end of an 11-month transition period without agreeing a trade deal.

Traders are also casting an eye on the U.S. state of Iowa, where Democrats are kicking off a process to choose a challenger to President Donald Trump.

Market players say a victory by a progressive candidate such Senator Bernie Sanders and Elizabeth Warren could hurt shares and lift safe-haven currencies as some of their policies are thought to be not in best interests of Wall Street.

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