Making Sense

RBI's policy decision was largely on expected lines and couple of points that stood out to me from the policy document and the press conference are stated below: 1. Inflation is moderating but the pace of disinflation is uneven and slow and there is still a distance to cover to align headline inflation to target.  2. RBI is watchful of all incoming data from domestic as well as external  sources and ready to deal with all emerging situations. However, the Governor noted caution in reading too much from a single month's employment number since Atlanta Fed GDPNow data is still trending at 2.9% and US has demonstrated growth resilience.  3. On the LCR , the draft circular is still under consideration. According to research reports, estimates are that draft guidelines on LCR if implemented could absorb liquidity in the ball park 5 Lac crore range.  4. On the decision to exclude newly issued 14Y and 30Y  bonds from FAR securities, DG Patra explained in detail th...

 RBI announced the monetary policy decision on expected lines Interest Decision              No change 6.25% - 6.50% - 6.75% (SDF - Repo - MSF).  Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points. The term of External MPC members  Policy Stance           Withdrawal of Accommodation (the monetary policy stance hinges on the direction of policy rates). The Governor stated that the stance of monetary policy should be read in the context of incomplete transmission and inflation above 4% target.  Liquidity management            No measures announced. Central Bank will continue to be nimble in liquidity management and will use an appropriate mix of instruments to modulate durable and frictional liquidity . Government spending has picked up which has augmented system liquidity Projections   ...

T he MPC is scheduled to announce the interest rate decision on Feb 8, 2024. Expectations: Interest Decision     No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance        Withdrawal of Accommodation (the monetary policy stance hinges on the direction of policy rates) - Strength of the Domestic Economy gives RBI the latitude to be patient to assess evolving risks and retain the possibility of a further hike, hence no change in policy stance is expected. Liquidity management The system liquidity deficit reached a peak of 346K Crore on Jan 24. The O/N WACR was seen at 6.77%. The system liquidity has steadily improved and the WACR dropped to 6.29% on Feb 2, 2024. The reason being that market participants have taken up 250K crore through a 15 day Repo conducted by the RBI on Jan 25, 2024 and as liquidity conditions have progressively improved on month end Government spending, market participants are parking funds in SDF and the...

 "What a wise man does in the beginning, a fool does in the end." RBIs beginning remarks state that Major Central Banks have kept rates on hold while refraining from forward guidance in view of prevailing uncertainties and that's what RBI did too. RBI announced the monetary policy decision on Friday. The Repo rate was kept unchanged and the monetary policy corridor with SDF at 6.25% and MSF at 6.75% retained. The withdrawal of accommodation stance was maintained.  The growth projection for FY 2024 was revised higher by 50 bps to 7% and Dr. Patra suggested that the growth outturn could be higher based on high frequency indicators in Oct and Nov 2023.  Inflation projections for FY 2024 were retained at 5.40%. For next FY, Inflation is seen to average 5.20% in Q1 and decelerate to 4% in Q2 before reaccelerating to 4.70% in Q3. The risks to the inflation outcome come from uncertainty in food prices. Rabi sowing of wheat, pulses and spices need to be closely monitored. The tra...

"Progress is absolutely assured when there is unalterable dedication to the purpose." Interest Rate Decision    Unchanged at 6.5% and Monetary Policy Corridor at 6.25% (SDF) and 6.75% (MSF) Monetary Policy Stance Maintained the stance as withdrawal of Accommodation  Liquidity Management Framework On the liquidity front, Liquidity deficit turned neutral as Government spending kicked in. RBI announced a reversal of liquidity facilities during weekends and holidays from Dec 30 and the measure will be reviewed after 6 months or earlier. The objective of this measure was to institute better fund management by banks.  There was no need for OMO Sales as system liquidity deficit remained in deficit before turning neutral at start of Dec while keeping the door open for OMO Sales The Outlook for FY 24 Growth was materially revised higher by 50 bps while Inflation Outlook was retained at 5.40%. 

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 ...

 The MPC is scheduled to announce the interest rate decision on Oct 6, 2023. Expectations: Interest Decision                No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance             Withdrawal of Accommodation ( the monetary policy stance hinges on the direction of policy rates)   Liquidity management  After the liquidity tightness in September,  Liquidity deficit continued to improve with LAF injection as on Oct 3 at 40K from Sep 29 at 100K. As the Government expenditure kicks in and amounts impounded under I-CRR are released, liquidity could slowly turn positive. The period starting Oct - Mar will see liquidity tightness on account of increased demand for currency. Diwali, Dussehra, 5 state elections, seasonal increase in demand on Rabi Harvest, marriage season and Hindu Festivals followed by  general elections could see an estimated rise of 4% in ...

“…inexhaustible perseverance and patience… knows no defeat.”  RBI announced the MPC decision today. Key Highlights: Repo Rate stands unchanged at 6.50% (unanimous decision) SDF Rate 6.25% and MSF at 6.75% Stance continues to be "withdrawal of accommodation" (Vote 5 to 1) Inflation projected moved 10 bps lower for full FY 24 to 5.2% from 5.30% on crude oil price assumption of $ 85 per barrel ( last policy $ 95) and a normal monsoon.  Inflation Outlook - The risk to inflation trajectory are evenly balanced with upside risk emanating from adverse climatic conditions, higher and likely to stay elevated milk prices into the summer, rising uncertainty in Intl Financial markets and imported cost pressures GDP is projected to grow marginally higher at 6.50% with 10 bps upward revision in both Q3 and Q4 FY 24.  GDP Outlook - The risks to domestic growth are evenly balanced. High Rabi production, steady growth in services sector, GoI's focus on capital expenditure, higher capacity ...

RBI announced a 5 day VRR (Variable Rate Repo) auction for an amount of INR 75K Crore. A total of INR 94637 of outstanding Repo operations is due to mature today.   As on 23 March 2023, Liquidity injection through the LAF window was to the tune of INR 45K Crore and weighted average call rates have eased from 6.66% to 6.56%. Cash balances maintained with RBI dipped to INR 790K Crore from previous day INR 818K Crore. 

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 ...

"The details are not the details. They make the design" RBI MPC Meeting minutes: Dr. Ashima Goyal and Prof. Jayanth R. Varma voted for no change in policy rates and favored a change of monetary policy stance to neutral while the other 4 members voted to increase the policy rate by 25 bps and maintained stance to withdrawal of accommodation. Dr. Bhide / Dr. Ranjan / Dr. Patra and the Governor expressed concerns on the sticky core inflation and maintained durable disinflation in prices is a necessary condition to necessitate a pause in hikes.  Fed Meeting minutes: The Federal Reserves also released the minutes of the monetary policy meet on Feb 1, 2023. The committee acknowledged that while significant progress had been made towards a sufficiently restrictive policy stance and inflation pressures have moderated, inflation continues to be elevated and labor markets continue to be tight contributing to wage price pressures. The consensus was for a 25 bps rate hike as a slower p...

 "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...

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...

RBI will announce the monetary policy decision today where the consensus is for a last 25 bps rate hike in the current cycle to a terminal rate of 6.50%.  While there is a loss of growth momentum but the economic activity is in a position of strength. The major headwind is from a global slowdown as a result of sharp interest rate hikes. Headline inflation is to decelerate in the quarters ahead but the stickiness of core inflation is a concern and RBI rhetoric during the last policy focussed on putting the inflation beast down.  I am leaning with the consensus expectations of a 25 bps rate hike. Regarding the monetary policy stance, I think it would continue with "withdrawal of accommodation" Let's begin by reviewing some of the important data points: 1. Manufacturing PMI reading came in at 55.40 clearly showing a loss of growth momentum though still in expansion mode. A key area of weakness in the report was "Exports" which increased marginally at best and moder...