After a peeved US President Donald J Trump dealt repeated tariff blows, another member of his cabinet is proving to be a tough nut for India. Secretary of Treasury Scott Bessent told Bloomberg TV last week that India could be hit with sanctions or secondary tariffs on it could go up. That is, if Russian President Vladimir Putin doesn't play ball and India continues to buy Russian oil.
No Deal Here
The Alaska Summit between Presidents Trump and Putin did not yield a deal immediately, but hectic trans-Atlantic parleys continue to hold out hope of hostilities between Russia and Ukraine ending soon. The Trump White House believes that the squeeze on Indian purchases of Russian oil brought Putin to the negotiating table in Alaska, although in a post-summit interview with Fox News, Trump seemed to suggest that it did not matter. Bessent has told Europe that it is not doing its part because it is yet to join the US in imposing secondary tariffs on India. "It's put up or shut up time," he told Europe. He termed India a "bit recalcitrant" in trade talks, which failed to produce a deal before the August 9 deadline despite the early momentum set by Prime Minister Narendra Modi's meeting with Trump in the White House in the first month of his presidency.
Also Read | "Trump Didn't Lose, Putin Clearly Won": Ex-US NSA John Bolton On Alaska Summit
While Elon Musk and JD Vance largely stole the limelight in the early days of the Trump Presidency, Bessent has now emerged as one of the most influential members of the cabinet. He has the President's ear and Wall Street considers him its own insider.
Bessent told Bloomberg TV that he expected trade partners to adjust their policies to soften the blow of high tariffs. He also expects exporters to the US to trim margins to keep prices low to soften the impact of new US levies. Almost on cue, India has announced long-pending rationalisation and simplification of its goods and services tax (GST) regime, including speeding up credits and refunds. While the fine-tuning is still on, exporters are expected to benefit as input and financing costs will reduce, allowing them to cut prices, however marginally.
The Advice To Japan
Another remark by Bessent is likely to bruise India indirectly. In his interview with Bloomberg TV, the US Treasury Secretary publicly advised the Bank of Japan (BoJ) to raise interest rates. "They're behind the curve," said Bessent. "So they're going to be hiking, and they need to get their inflation problem under control." His statement, which he said was his personal opinion, came after a meeting with BoJ governor Kazuo Ueda. He also suggested, mirroring Trump, that the US rates are way too high and wanted the Federal Reserve to sharply hack rates.
At the least, it was an unprecedented public reflection of a personal opinion with the intention of creating a favourable global policy environment for the US dollar and American borrowers. While it is not unusual for a country's political leadership and its autonomous central bank to have diverging opinions on where interest rates should be, it has rarely happened that the finance minister of a major economy has publicly offered unsolicited advice to the central bank of another country.
The Man Who Broke The BoJ
After the remark from "the man who broke the BoJ", as Bessent was once nicknamed in Japan, the yen rose sharply. Bessent puts the BoJ in a quandary. If the central bank raises rates, it could be seen as a result of US pressure, even if the policy was warranted, and markets could start second-guessing every time a US policymaker comments on the country. It also erodes Japanese policymakers' ability to regulate markets with measured comments. Eisuke Sakakibara, Japanese vice finance minister in the late 1990s, was famously called 'Mr Yen' for his ability to swing the currency with his statements. Japan, anyway, is seen as bending backwards to accommodate Trump's demands. It inked a trade deal with the US last month, which includes an unusual investment pledge of $550 billion, to be deployed in core industries at the latter's discretion.
A Meeting In 2012
Bessent is an old Japan hand, pally with influential policymakers of that country and, as an investor, has profited immensely from Japan's policies. Even before Japan set about reviving its economy with some radical fiscal and monetary policies under Prime Minister Shinzo Abe and BoJ governor Haruhiko Kuroda, Bessent had his ducks in a row. Writing in the Fall 2022 issue of the International Economy Magazine as the founder and CEO of the hedge fund Key Square Group, Bessent mentions a meeting in 2012 that he and billionaire investor George Soros had with a key advisor to Abe, who was then preparing for his second term as Prime Minister. The advisor told them about the full scope of policies that Abe intended to pursue if he came to power.
At the time, Japan was plodding through an inordinately long period of recession, and Abe had vowed to pull it out of the deep rut with "Three Arrows: loose monetary policy, fiscal flexibility, and structural economic reforms".
Also Read | Putin Dials PM Modi, Shares Insights On Meeting With Trump Over Ukraine War
On the way back from the meeting, Bessent writes, Soros asked him if Abe's plan would work. "I'm not sure whether it will work, but it will be the market ride of a lifetime," he replied. As Abe rolled out his radical agenda, fund managers piled into Japanese assets and needless to say, Bessent and friends made bank.
Central banks the world over coordinated their policies for many years in response to the Global Financial Crisis of 2008-09. That informal pact crumbled in the aftermath of the Covid-19 pandemic. Japan held on to its ultra-loose monetary policy for more than a decade, until March 2024, when the BoJ raised its benchmark interest rate from negative 0.1% to 0.1%. Unexpectedly, it pushed it up again to 0.25% in July that year. March 2024 was the first time in 17 years that Japan had raised interest rates.
How India Gets The Stick
BoJ's surprise rate hike in July 2024 caught the market unawares, and the "yen carry trade" was badly impacted. The yen was a favourite currency of investors to borrow in because of the low interest rates and the country's economic size and stability. The borrowings were typically converted to US dollars to invest in lucrative assets elsewhere in the world. This is called the "yen carry trade". A chunk of that money found its way to Indian equities. The July hike led to a quick unwinding the world over, including India. To be sure, the impact was short-lived.
A rate cut in Japan was not expected in the short term, but persistent inflation may compel the BoJ to raise them towards the end of the year. Timing and magnitude surprises could occur if pushed by the US. This time, however, India could feel it harder because of US tariff headwinds.
The direct impact of a Japanese rate hike would be on Indian borrowers, whose appetite for yen loans has been increasing. A number of private companies, such as Reliance Industries, Bank of India, REC, Tata Semiconductor, JSW Steel, and PFC, have borrowed in yen. Several infrastructure projects also depend on loans from Japan. While the increase in interest rate may not impact the borrowing cost too much, considering the rates are currently super low, repayment could turn out to be costlier than expected.
(Dinesh Narayanan is a Delhi-based journalist and author of 'The RSS And The Making Of The Deep Nation'.)
Disclaimer: These are the personal opinions of the author
