Making Sense

Consistency trumps drama - Howard Marks Today, USDINR traded within the familiar 83.00 - 83.30 range with Nifty trading in green with gains of close to 1% following the move higher in US equities post the welcome NFP print.  Yield on IN10s trade ~ 2 bps lower at 7.30% as the specter of OMO looms large (swing high 7.39%).  Domestic Liquidity turned surplus on Nov 3 as Government Spending kicked in with system surplus seen at 13,500 crs. As the system turns surplus, the OMO estimates become crucial.  Facts - FY24 OMO sales are at INR 18K Crore. Government's Budgeted G-Sec gross borrowing is INR 15.43 trn and Net borrowing is budgeted at INR 11.81 trn. We can anticipate OMOs basis the turn in liquidity into surplus. (Refer to earlier article on the same) Durable liquidity arises from permanent or long term changes in liabilities of RBI , viz., expansion / contraction of CiC and increase/decrease of banking system reserves due to unsterilized FX interventions.  As on Oct...

 "Employ every economy consistent with thoroughness, accuracy and reliability" Month of Feb has been a cleansing month for the financial markets characterised by sharp reversal in the USD index and massive paying across Rates. On Friday, we touched a high of 104.70 on the USD index as yields spiked higher to 4.72% on 2Y and 3.93% on 10Y. As markets pared back the position ahead of the long holiday, markets pulled back to close the session at lows of 103.86 / 4.62% and 3.83% respectively. Today is a US holiday in observance of President's day.  On the domestic side, USDINR continues to trade in the 82.40 - 83.00 zone. MTD (upto 17 Feb) FPI flows stand at USD 500 mn. On friday, yields spiked higher after the 7.26% GS 2033 paper was devolved on PDs to the extent of 8255 crs. After the sharp spike on Friday, OIS Rates are down 2 - 3 bps beyond 3 months and 10Y Gsec trades at 7.37%. Forwards is seeing paying pressure as we draw closer to the end of financial year and liquidity...

 RBI released the November monthly bulletin.  Operations in the OTC segment show RBI net bought $ 4.36 bn of foreign currency and accumulated the long forward book to the extent of $ 8.25 bn with total outstanding forwards at $ 8.49 bn. RBI had unwound the forward book from a peak of $ 65.79 bn in March 2022 to $ 241 mn in Oct 2022 on FPI outflows and rising trade deficit.   You could refer to the  Oct 2022  data here. A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022.  The above data leans towards a pay on dips strategy. Interest Rate differentials are the primary drivers of FX Swaps with other factors like system liquidity, intervention, econ...

"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.