Global Risk Recovers !! S&P Says Manageable exposure of Indian Banks to Contagion risk and Unrecognized losses // Year End liquidity tightness for the Indian markets // INR caught in global headwinds // What to expect from Fed ?

After the tumultuous Asian Session yesterday, risk sentiment stabilized overnight as markets took comfort in the 

• spate of liquidity measures announced by CBs
• media reports of U.S. Treasury Department staff studying if federal regulators have enough emergency authority to insure deposits above the current $250,000 cap on accounts without the consent of Congress 
• and most recently Tsy Secretary Janet Yellen comments " US aggregate deposit outflows from Regional Banks have stabilised. Tsy, Fed, FDIC actiions reduced risk of further bank failures that would have imposed losses on Deposit insurance fund. Similar actions to protect Depositors could be warranted if smaller institutions suffer deposit runs that pose risk of contagion"

Sharp moves were seen across Rates. After the sharp dip in rates on write off of AT1 bonds by Credit Suisse, USD bonds pulled back. 

For Domestic markets, RBI injected liquidity through the LAF window to the tune of 79K crore on 20 Mar 23. As GST outflows happen in the next 2 days, LAF window uptake is estimated to be higher and on 24th March 2023, 95k crore of outstanding LAF operations will mature. RBI could announce roll over of the 14 Day Repo operation to smoothen the outflow and manage the year end rupee liquidity tightness.

The Weighted average call rate is trading towards the upper bound of the policy corridor at 6.69%. 

In yesterday's trade, OIS rates fell in line with the fall in global rates with 1 - 5Y bucket falling 9 bps. Rates rose in today's session by 4 bps points on average.     

USDINR continues to face resistance in the 82.70 - 82.90 area. Now, I'm leaning towards INR longs on improved current account dynamics , lower oil prices (oil prices have fallen 19% over the last 2 weeks) and positive seasonality. Since the collapse of SVB Bank, we have seen FPI outflows from equities to the tune of USD 940 mn but reckon the outflows to be contained. On the NIFTY, 16750 - 16800 , was supported yesterday and NIFTY bounced back sharply to close the session at 17107. Global uncertainties are likely to be headwinds for long INRs. 

Spate of liquidity measures by Central Banks and Government measures to ring fence the contagion risk arising out of bank run could see improvement in Risk going forward. FOMC rate decision and the following commentary will be very crucial for markets. Snippet from an earlier post below:

In the 22 Mar 23 policy rate decision what would the Fed do?

If they do not hike, I think, it will be construed as Fed being extremely concerned about the current financial fragilities which could spark risk aversion. 

If they do make a "robust decision" like the ECB and hike by 50 bps, the market could think Fed is making a big time policy error and the 2x10 spread could widen. 

Following the extremely strong January economic data, the Feb data does not offer any deep insights. 

Inflation continues to be elevated with core inflation still running a hot 5.50%. So the prudent thing, in my assessment and as also what is being priced in by the market will be a 25 bps hike in light of the recent events followed by a pause. 

The current banking crisis will likely impart a negative credit impulse to the economy and the path of future rate hikes is highly uncertain amid the turmoil. Between now and the next policy, if the weakness in economic data is to materialize alongside lower inflation prints driven by lower commodity prices , we could see Fed make a turn and start cutting rates.

If the banking situation is contained and there are no more dead bodies due to timely actions of the Central Bank and Government Authorities, we could see USD weakness.