Spelling out my thoughts

Hey people.. 

It's been a long absence.. I have been blessed with a baby and that explains.. 

I will be resuming my blogging now.. 

Analysing RBI's money market operations since beginning March, we observe announcement of variable reverse repo auctions. RBI in essence has been trying to maintain liquidity at current repo rate and not let the LAF window operate near reverse repo rate as that straight away amounts to 100 bps of rate cut.

Monetary Policy Review (MPR) shows that RBI is cognizant of the extremely high asset valuations of riskier assets such as equity and lower rated debt instruments due to ultra-loose monetary policy of AEs. Our vulnerability to a crash has increased. Many economists and traders have issued a warning in this regard, most recent being Jamie Dimon. Mohamed El-Erian concedes that most asset prices have been pushed to very elevated levels and he is now “mostly in cash”.

Upside risks to INR depreciation have only increased. So I would look to initiate buy side trades on USD against INR. Crucial supports on USDINR being 62.14 and 61.94. A break of 63.00 is necessary to take the pair higher to 64.00 levels.

RBI is announcing variable reverse repo which makes its stance on liquidity amply clear. Hence, all USD spot purchases will necessarily be sterilized. I do not see that stopping unless the liquidity situation becomes uncomfortable. We may continue to see paying in forwards in the near tenors which may trickle onto far months.

In its policy statement, RBI has indicated that USD forward purchases will be delivered over the next few months. Delivering of USD forward purchases implies injecting permanent liquidity in the system. Early indications of RBI’s non-intervention in the forward market can be construed from the LAF operations.