Making Sense

Current liquidity operations with the RBI As on 26th Dec 2022, the net LAF injection by RBI stood at 15K crore. Understanding the component wise break up is important here:  The maturity profile of the outstanding operations is as : RBI stance on liquidity RBI in the last monetary policy meeting retained the stance towards withdrawal of accommodation. The document stated "RBI remains watchful of evolving liquidity conditions and stands ready to inject liquidity, if required, to meet the productive requirements of the economy. This, however, would be contingent upon a durable turn in the liquidity cycle when banks would move away from holding large balances under the SDF and variable rate reverse repos". Anticipating the future liquidity trajectory Variable rate reverse repo stand at 13453 crs maturing on Dec 30, 2022.  Now the liquidity management framework (26 Sep 2019) recommended that the design of the corridor system generally requires system liquidity to be in a small de...

 "Discipline is the bridge between roads and accomplishment" Third estimate of the US Q3 GDP was revised higher to 3.20% from 2.90% on revision in consumer spending to 2.30% from 1.70%. The GDP Price deflator was revised up to 4.40% from 4.30%. Initial claims for the week ending Dec 17 2022 increased to 216000 (+2000) and continuing claims fell to 1.672 mn (drop of 6000). While David Tepper comments' , an American Hedge Fund manager, “I would probably say I’m leaning short on the equity markets right now because the upside-downside doesn’t make sense to me when I have so many people, so many central banks, telling me what they are going to do, what they want to do, what they expect to do,”; further roiled sentiment.  Strong GDP numbers, labor market strength and negative outlook from one of the most successful hedge fund managers added to market concerns of overtightening by Federal Reserve despite a declining inflation print and deteriorating data ( Home Sales / PMI / Re...

"There is nothing so fatal to character as half finished tasks" - David Lloyd George RBI released minutes of the MPC The minutes of Dec 5 - 7 MPC meeting were released. Please refer to the earlier posts  MPC Dec 7  and  Nov Inflation  blog post. RBI had raised policy repo rate by 35 bps to 6.25%. The SDF - MSF corridor stands at 6% - 6.5%. The broad narrative rests around downside risks to global growth and the drag from net exports; resilience of domestic growth; stickiness of inflation on partial pass through of higher input cost price pressures seen earlier. While the members agree on a lower trajectory of inflation, some members expressed their concerns on the lagged effect of monetary policy and that a wait and watch stance will be more appropriate other expressed concerns on inflation expectations becoming unhinged. Jayant Verma was a lone dove who dissented to the repo rate hike and status quo on stance (withdrawal of accommodation) while Ashima Goyal dissente...

 Goodmorning!! “A man is but a product of his thoughts. What he thinks he becomes.” - Mahatma Gandhi A quick wrap up of yesterday developments -  BoJ will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% and increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn. The move was attributed to improve the market functioning and formation of the yield curve. The JGB curve steepened with the 1x10 curve at 0.5350% from the earlier 0.34%. BoJ emphasized the current move as not a rate hike or policy accommodation removal. He also mentioned that he will be closely watching the next Spring's wage negotiations and the Trade Unions have announced a nominal wage growth target of 5%. However, the market does not believe the BoJ narrative and interprets the re...

"Trading requires skill at reading the markets and at managing your own anxieties"  - Ed Seykota The first thing I want to see in the monthly bulletin is the data on RBI Sale / Purchase of USDs and the change in forward position and the swap profile. The Oct Bulletin shows RBI has unwound the S/B Swap book. From a peak swap position of $ 73.21 bn as on March 21, the book now is a miniscule 241 mn. Upto 3 months, RBI is short USD forward and long USD forward beyond 3 months. RBI spot intervention stood at -922 mn.  In summary, since the start of FY, RBI spot intervention has been to the tune of $ 34.33 bn and forward intervention has been to the tune of $ 65.5 bn. Oct was the month when USDINR printed an all time high of 83.2850 and RBI exhausted the long forward position. The month of Oct saw fx reserves reach a 27 month low of $ 524 bn. 

Expect the unexpected !! The Big news today morning is the Bank of Japan (BoJ) monetary policy decision. BoJ Governor Kuroda who is nearing an end to his term did not fail to shock and awe the markets.  BoJ decided to modify the conduct of YCC (Yield curve control) in order to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions. Please note the modification was not attributed to higher inflation. So BoJ tightened and eased at the same time. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% . It will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations. It will also make nimble responses for each maturity by increasing the amount of JGBs even more and conducting fixed rate operations. BoJ increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn.  BoJ's monetary polic...

China Re-opening narrative / US Data / Indian markets The Chinese reopening story had fueled a risk rally however the evolving situation remains tenuous at best. Chief epidemiologist Wu of the Chinese Center for Disease Control and Prevention said the current outbreak would peak this winter and run in three waves for about three months (mid Dec - mid Jan, mid Jan - mid Feb - Chinese Lunar year starts on Jan 21 which typically sees a lot of people movement. mid Feb - mid March). In another news , A US-based research institute said this week that the country could see an explosion of cases and over a million people in China could die of COVID in 2023. There are 2 narratives on China - one is of optimism that the gradual easing of restrictions will unleash pent up demand and the second is even as China pivots towards reopening , the covid cases will surge and the authorities will be focused on flatlining the infections. The tapering of the covid wave in the second quarter could see re...

  "Believe. Think. Visualize" India trade deficit* in November improved to $ 24 bn on a 7% mom growth in merchandise exports to $ 32 bn and de-growth of 1% in mom imports to $ 56 bn. Electronic exports rose sharply while textiles, chemicals and other categories showed contraction. The table below shows Apr - Nov actuals and projected numbers for the FY. This will be the largest current account deficit posted by India.  For Dec - Mar numbers, exports are assumed at $ 30 bn. If the global recession fears materialize on aggressive tightening by Central Banks, the extent of demand destruction in the export basket will need to be closely watched especially since the Indian currency continues to be overvalued. The trade weighed REER index eased from 103.06 to 101.62 in Oct. Assuming a 10% destruction in exports, the export number for balance of the year is estimated at $ 108 bn. On the import side, $ 55 bn of imports per month is assumed. Savings of $ 1 - $1.2 bn are likely to accr...

 Hi, good morning !! "It is by logic that we prove. It is by intuition that we discover" - Henri Poincare' We had the FOMC rate decision last night where the FOMC raised benchmark interest rates by 50 bps to 4.25% - 4.50%. The Statement of Economic projections is what caught my attention. Real GDP growth for 2023 has been revised lower by a full 70 bps to 0.50%, core PCE inflation has been revised higher by 40 bps to 3.5%, headline PCE has been revised higher by 30 bps to 2.1% and unemployment rate has been revised higher by 20 bps to 4.6%. So between now and 2023, U/R will increase by 90 bps. The projected path of Fed fund rates is for a terminal rate to reach 5.10% in 2023 (up 50 bps) w/o any interest rate cuts and then 100 bps of rate cut in 2024 and 2025 to take the FFTR to 3.10%. The Fed Chair in his press conference also stated “There’s an expectation really that the services inflation will not move down so quickly so that we’ll have to stay at it”. “So we may have ...

 Hi Good morning folks,  "Our life is what our thoughts make it" We had the release of the much awaited US CPI data. Headline CPI rose 0.10% mom (est 0.30%) and core CPI rose 0.20% mom (est 0.30%). CPI yoy grew at 7.10%. The CPI numbers show a declining trend from the peak of 9.10% in June 2022. The number was lower than the range of estimates. Market is pricing in a terminal rate of 4.835% for the May 23 Fed policy. Peak terminal rate expectations have shifted by a full 42 bps between Nov 4 and today. The expectations are for a 50 bps hike in today's policy ( Dec 14, 2022) and another 50 bps until the May 23 policy with rates peaking between 4.75% - 5.00%. One interesting point about today's CPI print is the divergence between goods and services inflation ( chart below: source RealVision). The goods price inflation is coming off on demand weakness and de-clogging of supply chains.  Andreas Larsen of RV points to the strong correlation between China - US Freight Rates...

India CPI for Nov 22 rose 5.90% much below the consensus estimates of 6.40%. The fall in inflation was driven by 0.72% mom decline in prices of food and beverages ( 45.86% of the CPI basket). December generally sees seasonal food prices correction. Higher acerage of the winter crop is likely to aid the decline but a warmer winter weather is likely to be a cause of concern.  The headline print saw a decline to 5.90% however the core component continues to be sticky with core CPI at 6% ( excl food and beverages and fuel and lighting). Mom core CPI has averaged 0.50% price pressures continue to be broad based.  According to my estimates , the sharply lower print of 5.90% could see March23 headline print at 5.00% and the month of May will mark the cycle low in inflation prints. The September and the November print materially altered the year end projections.  However, at this point the stickiness of the core component as was highlighted in the RBI policy will be crucial. The ...

 The RBI in WSS published the weekly forex reserves data. We see $ 11 bn week on week change in Fx reserves. Acc to my estimates, assuming 30% non USD Foreign currency assets, the $ 11 bn swing could be explained as $ 3 bn swing on account of valuation change and actual $ purchases of $ 8 bn. From a low of $ 524.5 bn in the week ended 21 Oct 22, Fx reserves have steadily increased to $ 561 bn in the week ended Dec 2, 2022. 

 Like I mentioned in my dec 6, 2022 update, I liked paying forwards. Forwards have bounced sharply. 30 Nov 23 forwards are 10 bps higher (prev close 1.77%) with 129 trades going through and volume of $ 1.20 bn. Stay paid !! Dec 15 2022 - Forwards continue to be paid with the Nov 2023 contract trading upto a high of 2.05%. I'd like to book some profit at the current level (40% of the position size).

 Aloha !! I had a fantastic session in tennis today. Practiced the front hand technique with 400 balls trying to roll the ball and swing perfectly. Also practiced the serve at which I suck. Just can't bring myself to toss the ball correctly. Putting my mind and muscle to it.. it'll come through !! Now to the matter of markets, I'd say pretty well behaved.. haha On the US side of things, Initial claims for the week ending December 3 increased by 4,000 to 230,000 and continuing claims for the week ending November 26 increased by 62,000 to 1.671 million (highest level since February 2022). After the sharp 21 bps drop in 10Y US yields, yields stabilized and moved higher to trade at 3.45% cmp. Similarly, the 2Y yield dropped from highs to 4.4150% to 4.2550% and currently trades at 4.28%. The 2x10 curve inversion trades at 83 bps, levels last seen in the year 2000.  The US will release the PPI report today, CPI report on Dec 13 and on Dec 14, FOMC rate decision. Unless the abov...

According to the broad consensus, the MPC decided to hike repo rate by 35 bps to 6.25%, SDF 6.00% and MSF 6.50%.  Vote to increase rate 5/6 (Jayant Varma - vote of dissent) Policy stance was maintained as withdrawal of accommodation Vote to maintain stance 4/6 ( Ashima Goyal and Jayant Varma - vote of dissent) Economic outlook - good progress of rabi sowing / improving rural demand / sustained urban demand / pick up in manufacturing / rebound in services / double digit credit growth for 8 consecutive months Economic activitiy was strong going into October. Total flow of resources to the commercial sector expanded 14.7 lac crore upto Nov 23. While the momentum and outlook continue to be robust, headwinds arise from protracted geopolitical tensions / global slowdown and tightening of global financial conditions Please refer to the table below for updated RBI projections. Inflation outlook - stickiness in core inflation is the most important risk - risk from geopolitical tensions / fi...

 Hi Goodmorning !! Had a good tennis training session! Back to the markets now .. Yesterday, in the post market hours , USDINR traded a low of 82.3575 on sharp decline in crude oil prices as markets assessed the EU price cap on Russian oil to be comfortable and that most of the Russian crude oil purchases are well within the $ 60 / barrel price cap. U.S reported trade deficit of $ 78.2 bn on deterioration in exports and strength in imports. The data shows the continued resilience of the US economic activity which added to lingering concerns that Fed may over tighten and trigger a deep recession. Comments from Jamie Dion that a mild to hard recession could hit next year did not help the equities sustain the recent gains. The US 2Y yield fell 7 bps while the 10Y yield fell 10 bps with the curve inversion at record highs of 82 bps.  On the domestic front, we have the MPC rate decision scheduled at 10:00 am which I have covered in my previous post. The consensus is for a rate hike...

The markets are on a roller coaster ride, uncertain and jittery.  Yesterday,  a WSJ articles by Nick Timiraos, likely source to float Fed's thinking, suggested that persistent wage inflation could see terminal rates higher than 5%.  " Policy makers expect price pressures to ease meaningfully next year, but brisk wage growth or higher inflation in labor-intensive service sectors of the economy could lead more of them to support raising their benchmark rate next year above the 5% currently anticipated by investors."  The sharp sell off in the USD index and US yields of the past few days turned with USD index bouncing off 104 lvls to 105.30 and UST climbing 12 bps on 2y paper and 11 bps on 20y paper. The curve inversion stood at 80 bps. Strong non manufacturing US PMI added to concerns that Fed might over restrict policy and consequently risk a deep recession.  For India , the services PMI data came in at 56.40 ( exp 55.4). According to market sources, dividend pay...

 RBI will announce the MPC decision on Dec 7, 2022. The current repo rate is 5.90%. OIS markets are pricing in 35 bps of rate hike in the Dec policy and terminal rate of 6.5% by June policy which coincides with the peak in Fed fund pricing.  The current liquidity is in surplus with LAF numbers for Dec 2, showing a surplus of 172,000 crore (government spending plus maturity of forward contracts) and weighted average call money rate trading at 5.41% much below the rate of 5.90%.  Wholesale price indices have been declining after the 15.88% peak in the month of May. The oct print came in at 8.39%. The Oct CPI came in at 6.74% (prior 7.45%)      In the meeting of the minutes of the RBI policy of the 28 - 30 Sep, Dr. Ashima Goyal warned of the risks of aggressive tightening of rates as detrimental amid demand uncertainty. With forward real rates being in positive territory and lagged effects of monetary policy, I think her stance will be to hike cautiously and h...

 Hi Goodmorning !! "Do or do not. There is no try !!" There appears to be recalibration in China's broader approach to the pandemic as local authorities have continued to ease restrictions even as covid cases continue to climb. Restrictions have been lifted by ending mandatory Covid testing for people using the public transport / parks / public spaces. Last week comments by Xi Jinping to the European Union delegation reflect the stance. Citing WSJ, China’s leader, Xi Jinping, told a visiting European Union delegation that recent protests in the country reflected frustration about Covid controls and suggested the pandemic has entered a less deadly stage.  OPEC+ ministers endorsed the output policy rollover (production cut of 2 mn barrels). The next meeting will be on February 1, 2023. G7 + Australia reached consensus on Russia oil price cap at usd 60 / bbl.  US NFP rose 263K ( consensus 200k). Average hourly earning rose 5.1% yoy. 

 Fx Data As on 30 Sep 22, India Fx reserves declined to $ 533 bn from a peak of $ 642 bn ( Oct 21), a decline of $ 109 bn.  RBI Sep Spot intervention was to the tune of $ 33 bn. RBI's forward book is not part of the Fx reserves. Hence, it could be inferred that the decline in Fx reserves to the tune of $ 33 bn was on account of intervention and the balance $ 76 bn was on account of valuation swings. The above ties in when the RBI Governor had said in September that 67% of the drop in forex reserves was on account of valuation swings.  Looking at the forward book, RBI Sep forward intervention was to the tune of $ 10 bn. FYTD Sep, forward book intervention stands at $ 55 bn and outstanding RBI forward book now stands at $ 10 bn.  FYTD Sep, RBI intervention stands at $ 89 bn. 

 India Oct trade deficit data came in at $ 26.91 bn. FY 22 - 23 till Oct came in at $ 183 bn.  Exports peaked in the first quarter of FY 22 - 23 and have steadily declined in line with a subdued global outlook. Exports contracted 9% mom to $ 29.78 bn while imports contracted 4% to $ 56.69 bn. Fall in exports was largely driven by  cotton yarn/handloom, gems and jewellery exports, and engineering goods. The Oct estimated services surplus came in at $ 12.28 bn and trade balance therefore stands at $ 14.63 bn. 

 Hello everyone !! India CPI and WPI data release shows CPI easing to 6.77 % (prior 7.41%) and WPI easing to 8.39% ( prior 10.70%). The CPI release looks in line with RBI's delineated path with 6.50% print for Q3 but the Q4 prints could average 6.05% according to my estimates and inflation could ease below 5% from start of next fiscal year on higher base effects.   We continue to be watchful of rise in cereal prices. Decline in paddy acreage due to unseasonal rains, elevated wheat prices alongside lower stocks government warehouses (50% less than last year) continue to pose risk to inflation outlook. Sowing for the rabi season has been encouraging which could bode well for the inflation trajectory to evolve along expected lines.  Liquidity is in small surplus with liquidity absorption at Inr 66K crore and call rates trading closer to the repo rate at 5.90% and daily Cash tom points falling to 0.50 ps. Benign liquidity conditions and easing inflation favor the receive...

 Release of the US CPI print was the single most important event for financial markets. Yesterday's release showed moderation with headline print at 7.70% yoy (prior 8.20%), 0.40% mom (prior 0.40%) and Core CPI at 6.30% (prior 6.60%).  The data release confirmed few narratives. The June print of 9.1% CPI marked the peak in inflation and FOMC will slow the pace of rate hikes. Market is now pricing in the terminal rate at 4.92%. Post the FOMC , mkt had priced in a peak terminal rate of 5.25%. Interestingly, there has been extensive talk on the Shelter component of US CPI which measures rental values / imputed rent (owners' equivalent rent) and lodging away from home. Though the shelter component rose 0.80% mom, the sticky OER component rose 0.60% (prior 0.80%) which is a welcome sign. The markets went into a frenzy mode or may be long liquidation mode. USD fell across the board, bonds rose and equities rose. Also aiding the sentiment was China adjusting protocols for covid contr...

Market estimate of Oct inflation as per Reuters poll is 6.73% with estimates ranging between 6.40% - 7.35%. My own estimates show the inflation print to be 6.60% based on average mom trend over the last decade. A print of 6.56% will be considered benign. A print lower than 6.70% will suggest inflation to evolve along RBI suggested rate trajectory with Q3 averaging 6.50% and then decline by March below the 6.00% level. My concern emanates from a print closer to 7% where RBI would be forced to raise rates by 50 bps in December meeting and the market would be quick to price terminal rate at 7% instead of the current 6.75%.  Considering no commodity shock and lower inflation on seasonality trends , interest rate markets have shown receiving interest over the last month.  We keep a close eye on CPI inflation data to see if more hawkishness needs to be built in to the price. Remember,  I have been mentioning that more hawkishness will be a function of how usdinr behaves as abse...

Happy Diwali everyone !!    Additional Meeting of the Monetary Policy Committee for 2022-2023 RBI today slated an additional meeting of the MPC on Nov 3, 2022 u nder the provisions of Section 45ZN of the RBI act. There was a flutter among participants regarding this meeting since it is scheduled immediately after the U.S FOMC Rate decision on Nov 2, 2022.  Provisions  of Section 45ZN of the RBI act pertain to  F ailure to maintain inflation target.-- Where the Bank fails to meet the inflation target, it shall set out in a report to the Central Government-- (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions. Regulation 7 of the RBI MPC and MPR Regulation, 2016 pertain to the requirement for RBI to  send the report to the Central Govern...

  The recent announcement by the OPEC+ to cut oil output by 2mb/d is a big one. The announcement reeks of political leanings as the OPEC+ combined  unanimously  decided  to cut output in a meeting that lasted less than 30 min. Clearly President Joe Biden's visit to Saudi Arabia 3 months back did not yield any dividend. Prince Abdulaziz said the real cuts would be 1.0-1.1 mb/d since OPEC+ failed to meet production targets. OPEC+ production fell about 3.6 mb/d short of its output target in August. Analysts are divided on the actual cuts as  J efferies said they estimated the real cuts at 0.9 mb/d while Goldman Sachs put it at 0.4-0.6 mb/d. **Now the question that comes is can the US balance the market through SPR release? SPR capacity is at 714 million barrels (mb) which will fall to 342 mb after the 180 mb release announced on Mar 31, 22 is complete. Can the administration release more? IEA says  SPR must retain the equivalent of 90 days’ worth of the p...

 India recorded BoP surplus of $ 4.5 bn for Q1 22-23. Current account deficit came in at $ 23.90 bn and capital account recorded a surplus of $ 28 bn explained by short term credit of $ 8.7 bn and $ 19 bn in bank capital. 1.        Merchandise     -68.50 As    Monthly trade deficit for first 5 months is usd 129 bn and for the balance of the year estimated deficit is usd 25 bn pm , then yearly number is likely at usd 300 - 305 bn. 2.        Invisibles           44.66 ( Services        31.71;  Transfers     22.85;  Income        -9.26)       The year end number is estimated at usd 160 bn wherein services surplus could average usd 30 bn pm ( usd 120 bn surplus); transfers at usd 80 bn and income outflow at usd 40 bn. I      Current Ac...

  Federal Reserve Rate decision The overarching theme of the FOMC was price stability and that Federal Reserve would like to see compelling evidence that inflation is moving down, consistently with the 2% inflation target. That would mean a restrictive stance of monetary policy, growth below trend, improved demand supply balance of the labor market. On Sep 21, 22, FOMC raised the Fed funds rate by 75 bps to 3.00 - 3.25%. The committee marked down the GDP projections by 200 bps into 2023, increased expected inflation estimates by 20 bps into 2023 and shifted the terminal rates estimate higher to 4.625% from earlier 3.75%.  The table below captures the change in Fed funds target rate estimates since 2021. The table below implies 125 bps of rate hike in the next 2 policy meetings in Nov and Dec and another 25 bps of rate hikes into Q1 of next year. The market is now pricing 4.67% peak rate by May 2023 and thereafter 33 bps of rate cuts into the Q4 2023.  3.125% ...