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...

The earlier article covered the MPC decision  and since I had not covered the Minutes released on Oct 20th, I wanted to sum up the highlights as below: 1. Inflation  Inflation spike seen in July and Aug as transitory Spatio-temporal dispersion in the rainfall could cause volatility in food prices Food inflation may not see sustained easing in Q3 but ample buffer stocks and supply side measures from the Govt likely to buttress the impact of rise in vegetable prices MPC draws comfort from deceleration in Core CPI Outlook uncertain 2. Growth Momentum to Sustain Decrease in Household net Financial Savings and an Increase in Financial liabilities support consumption Q3 to be buoyed by festival demand Private Sector investment is gaining pace Drag comes from the external sector 3. Real Rates are positive 4. Liquidity will be actively managed, incl OMO sales We had seen a sharp sell off in bonds following the mention of OMO sales on Oct 6. The system liquidity continues to be in...

System Liquidity turned negative as the LAF numbers released by RBI show a deficit of inr 42K crore from a surplus of 2K crore yesterday. This deficit in liquidity is being attributed to short tenor S/B FX Swaps conducted by RBI.  Yields on the IN10s surged following the announcement of likely OMO sales in the RBI policy on Oct 6. Despite the sharp fall in US yields yesterday on dovish Fed speak and safe haven buying, Yields on the 10Y closed (at 7.35%) near the day's high of 7.37%. Reckon OMO announcement will only come once there is a decisive turn in system liquidity to surplus and a durable decline in weighted average call rate (WACR) in the overnight segment. The WACR yesterday was 6.72%. Today the Gsec yields are trading lower at 7.3150%. Keeping a close watch on evolving liquidity conditions while forecasting the liquidity requirement on a weekly basis will be important to judge the timing of the OMO sales. 

Rate Decision      RBI policy mentioned the use of OMO sales which is a more durable liquidity absorbing measure and the catalyst for a policy pivot comes from a durable decline in inflation to near about 4% Policy Rate                               Unchanged Stance of Monetary Policy Withdrawal of Accommodation ( 5 - 1) Growth Projections                     Unchanged (2024 FY 6.50%, Q1 25 6.60%) Inflation Projections           Unchanged (2024 FY 5.40%, Q1 25 5.20%) Liquidity                                    May have to consider OMO sales Key takeaways from the earlier meeting 1. Inflation target is 4% and a Pivot in policy from tightening to accommodative will not happen ...