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There has been no progress made on resuming trade ties between India and Pakistan over the last three years, the Centre has informed the Parliament.

"In August 2019, Pakistan announced the suspension of bilateral trade with India. Pakistan partially relaxed its ban on trade with India in September 2019 by permitting trade in certain pharmaceutical products," V Muraleedharan, Minister of State in the Ministry of External Affairs, said in a written response to a question in the Rajya Sabha on July 28.

"There has not been any progress regarding resumption of trade with Pakistan since then," Muraleedharan added.

Pakistan suspended trade with India on August 7 2019, days after New Delhi abrogated Article 370 and removed Jammu and Kashmir's special status.

The move saw trade between India and Pakistan slump to $329.26 million in FY21 from $2.56 billion in FY19.

India's exports to Pakistan amounted to $2.07 billion in FY19 - 0.63 percent of all its exports - while imports stood at $494.87 million. In FY22, India exported $513.82 million worth of goods to its neighbour - just 0.12 percent of all its exports - and imported a mere $2.54 million worth of merchandise.

Indian government bonds and the rupee strengthened on Thursday despite a 75-basis-point (bp) rate hike by the US Federal Reserve as key aspects of the central bank’s commentary were perceived as indicating that future policy tightening may occur at a slower pace in the world’s largest economy.

At 9.30 am IST, the rupee was trading at 79.78 per US dollar, stronger than 79.90 to a dollar at previous close. A sharp rise in domestic stocks also boosted the rupee, with the BSE Sensex and the NSE Nifty both trading 1 per cent higher.

Yield on the 10-year benchmark 6.54 per cent, the 2032 government bond was at 7.31 per cent, three bps lower than Wednesday’s close. Bond prices and yields move inversely.

Also Read: Indian diaspora, global bankers may profit from New Delhi's dollar crunch

Late Wednesday, the US Federal Reserve announced a 75-bp rate hike, taking its benchmark policy rates to 2.25-2.50 per cent. The latest move takes the total tally of rate hikes announced by the US central bank so far in 2022 to 225 bps.

While the US central bank reiterated its commitment to reining in 40-year high inflation in the US, markets took comfort from US Fed Chair Jerome Powell’s assessment that as the stance of monetary policy tightens further, “it may become appropriate to slow the pace of (rate) increases.”

The aggressive pace at which the US Fed has raised interest rates thus far in 2022 has been a key reason behind the large-scale exodus of foreign funds from Indian equities as investors have preferred improved returns in the US. FPIs have net sold $28.6 billion worth of Indian stocks so far in 2022, the largest outflow so far on record, NSDL data showed.

As a result, the rupee has faced considerable pressure versus the dollar this month, weakening to a lifetime low of 80.06 per dollar on July 19.

“The markets consequently cheered the indication that the biggest rate hikes of this cycle were over,” economists from ICICI Securities wrote.

US bond yields fell sharply after the Fed’s statement, with the 10-year yield declining 5 bps to a three-and-a-half-month low of 2.73 per cent, while the five-year yield dropped 7 bps to 2.97 per cent.

The US dollar index, which earlier this month had climbed to a 20-year high of 108.54, declined as well. The index was last at 106.31 as against 107 around 5 pm on Wednesday.

Lower US bond yields make Indian debt more attractive for foreign investors.

“Domestic government bonds have rallied in line with the OIS (overnight indexed swap) market. The swap curve has steepened as short-term swaps have fallen sharply on view that the Federal Reserve will now be data dependent instead of providing clear forward guidance of rate hikes,” ICICI Securities Primary Dealership’s Head of Trading Naveen Singh said.

With the Reserve Bank of India (RBI) said to have been strongly defending the rupee whenever it approaches 80 per dollar, currency traders said the domestic currency would likely stabilise after the recent bout of volatility.

“So far, RBI has kept a strong hold on USD/INR above 80 levels and curbed rupee depreciation. Also, the unwinding of the open interest position yesterday didn’t move the rupee much as the RBI might have intervened heavily to avoid a sharp move as seen in the June expiry,” wrote Amit Pabari, managing director of CR Forex Advisors.

Also read:- As credit demand grows in India, banks may soon be scrambling for deposits

Loan growth in India is at a three-year high and seen inching up further as economic activity gains traction but a much slower growth in deposits could send banks scurrying for funds and prompt deposit rate increases, say analysts and bankers.

Deposit growth has floundered as high inflation has resulted in less savings, as would be depositors are choosing to put money into shares and mutual funds in search of better returns, said Madan Sabnavis, chief economist at state-owned lender Bank of Baroda.

In order to bulk up its deposit growth, country's largest private lender, HDFC Bank has started a short-term drive to beef up its deposits by offering a higher rate of interest on non-resident accounts held by Indians living abroad. Analysts believe that other lenders may also follow suit with similar moves.

As surplus funds in the system get slowly pulled out by the central bank measures, banks' margins and their profitability could come under pressure, forcing them to not just raise deposit rates, but also possibly go to the more expensive capital markets to raise funds needed to meet credit demand.

That could worry investors, already in retreat due to global factors, and send banks' stock prices further down.

Rating agency ICRA said in a note last week that it expected banks "to aggressively start chasing deposits, which will also lead to higher deposit rates."

Indian banks' deposit growth, currently at 9.8%, has stayed in single-digits for a large part of the last 14 months, while credit growth - having touched a record low of 5.6% in FY21 - has nearly tripled to 14.4% in the fortnight to July 1st.

Retail loan growth which includes personal loans, mortgages, auto loans has steadily been growing at a faster clip and continues to outpace corporate credit.

"Personal loans have been the main growth driver for the Indian banking sector during the past few years, as corporate lending has stalled due to NPAs (non-performing assets) and deleveraging," CARE Ratings said in a report earlier this week.

Going ahead, while the prospects for credit growth appear promising, high inflation and rate hikes may cast a shadow, CARE said.

Banks' credit-deposit ratio - currently 73% of banks total deposits are being lent out - has been steadily rising, indicating that their earning capacity is also improving.

But as credit demand picks up, there could be pressure on funding unless deposit growth matches up

In the next few months if the trend continues then we will have no other option but to raise deposit rates because the market conditions are also not very favourable for us to go to the market to raise growth capital," said a senior executive at a state-owned bank.

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