Making Sense

 "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...

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 ...

 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 ...

For the week until 29 Mar 2023, liquidity improved from an injection of INR 46K Crore through the LAF window to an absorption of INR 38K Crore as Government month end spending kicked in. Outstanding operations of INR 95K matured this week. RBI had announced a 56K crore fine tuning operation which matured on 28 Mar 2023. Market was expecting an announcement of another fine tuning operation to smoothen the year end volatility but none came. The weighted average call rate (WACR) came in at 7.11%. RBI Governor, Mr. Das, had earlier suggested in the Dec policy that market participants must wean themselves away from the overhang of liquidity surpluses. I think RBI is trying to manage the WACR within the upper bound of the policy corridor (6.75%) and thereby suppling just about enough liquidity to manage the friction.  The durable liquidity surplus which stood at 101,000 Crore as on 10th March 2023 will move either flat or negative in Q1 FY2024. This is driven by an estimated 4% rise in C...

RBI announced a fine tuning liquidity operation to the tune of INR 75000 cr for liquidity infusions on 24th March 2023 on account of maturity of 95K crore of outstanding Repo operations. The uptake was to the tune of 56K Cr, lower than the notified amount of 75K cr. Accordingly, Liquidity injected from O/S operations stands to the tune of INR 92K crore and fine tuning operations stands at 56K crore. Net liquidity absorbed through the corridor facilities (MSF + SDF) stands at 70K crore. LAF injection is at 78K crore . W eighed Average Call Rate has been stable at 6.55%.   Durable Liquidity has been steadily declining and as on 10 March 2023, the number stood at 101K cr declining 58k cr between 24 Feb 23 and 10 Mar 23. As on 16 Dec 2022 durable liquidity was 299K cr and CIC 32.41 Lac cr. CIC for the w/e 10 Mar 23 is 33.73 lac cr, change of 1.3 lac cr. So durable liquidity has seen a change of 198k cr which can be explained through 1.3 lac cr change in CIC and the balance Inr 68k cr ...

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 ...

BoC, BoE, BoJ, ECB and the Federal Reserve announced  announced an expansion in the frequency of USD swap line operations from weekly to daily.  Press Release: To improve the swap lines' effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April. The network of swap lines among these central banks is a set of available standing facilities  and serve as an important liquidity backstop to ease strains in global funding markets , thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses. For the week ending 15 March 2023, the facility usage was to the tune of USD 472 mn. The facility is used extensively in times of severe stress as in during the covid crisis or the Global Fin...

  Quick wrap on the market moves in the Asian Session: USDINR touched a low of 81.63 on Monday and caught a bid towards the end of the session as risk sentiment deteriorated. Today, trading in USDINR has opened with a gap up on hawkish remarks from the Federal Reserve Chairman. Balance 25% holdings were squared on the gap up. Next crucial resistance for the pair is 82.30. Domestic equity markets are trading in the red with Nifty at 17700, down 0.30% and is seen facing resistance at the 17770 level .  India  Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -49,000 crores (-61,000 crs) O/S Repo                                  +89,000 crore (+86000 crs) SDF+MSF                       ...

"The goal of a successful trader is to make the best trades. Money is secondary." Quick wrap on the market moves at the start of Asian Session: USDINR is in a strong momentum lower and part of the position was squared off  . Follow the momentum !! 81.75 is an important support but the move could very well stretch to 81.50 or 81.02. We need to look for price action to confirm a reversal trade. Patience !! Patience !! Domestic equity markets are trading in the green with Nifty at 17788, up 1.1% after failing to break the 200 DMA at 17414. FPI flows have been stable with Friday number seen at $ 30 mn inflow. The Services PMI released on friday showed services activity at a 12 year high and robust GST collection of Inr 1.50 trn in the month of February. India Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -61,000 crores (-82,000 crs) O/S Repo      ...

Follow your Playbook of trades !! USDINR trade has worked beautifully. Yesterday, we did get a sideways consolidation to initiate shorts for better part of the day. The next important support is 81.75 where profits can be booked on 75% of the position.  GQG Partners on Thursday announced the completion of USD 1.87 bn secondary equity transactions in the Adani portfolio companies.  Brokerage firm Citi estimates that the increase in free float in Adani Group companies will lead to inflows b/w usd 200 – 230 mn and the possibility of a change in weightage in MSCI's May review. Services PMI at a 12 year high The S&P Global India Services PMI expanded to a 12-year high of 59.4 in in the month of February ( prior 57.2 ) showing the best improvement in new business intakes in 12 years. Input cost inflation eased to a 23-month low, while output cost inflation slowed to a 12-month low.  In the recently concluded Assembly elections in North East – Nagaland, Meghalaya and Tripura...

 Meditate!!  The February ISM Manufacturing Index came in at 47.70 (prev 47.4). The reading reflected contraction in manufacturing activity for the 4 th straight month. However, what stood out in the report was the sharp increase in the Prices Index which jumped to 51.3 from 44.5 and the new orders index rose to 47.0 (prev 42.50). The activity contracted at a slower pace amid a backdrop of rising prices which adds to fears around Fed tightening. Comments from FOMC voting member   Neel Kashkari also pushed rates higher. “We’re not yet seeing much of a sign of our interest-rate increases slowing down the services sector of the economy and that is concerning to me,” he said. “Wage growth is at a level that it actually is too high to be consistent with our” 2% inflation target. He also said that if the Fed declares "victory too soon, there will be a flood of exuberance" and it will need to do even more work that if the Fed declares "victory too soon, there will be a flood...

 "The difference between try and triumph is just a little umph!" Q3FY23 Real GDP grew 4.40% yoy lower than consensus estimates of 4.60% following an upward revision of 80 bps to FY 21 to -5.80% (previous est -6.60%) and 40 bps to FY 22 to 9.10% (previous est 8.70%). India's GDP during 2022-23 is estimated to grow at 7.0 %. RBI had projected the real GDP growth for 2022-23 at 6.8 %, with the third quarter and fourth quarter growth at 4.4 % and 4.2 %, respectively. S&P Global Manufacturing PMI expanded for the 20 th straight month with the February reading coming in at 55.3. Input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Recent data shows waning momentum after the Dec peak of 57.20. The Conference Board Consumer Confidence Index decreased in February for the second consecutive month to 102.9 down from 106.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor ...

"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...

 The concluding remarks of the Monthly Bulletin are beautiful. It says, "In mythologies across civilisations, the sun is depicted as riding a chariot typically drawn by four horses. In Indian mythology, the sun's chariot is drawn by seven horses. The seventh horse represents dreams, aspirations and the future. It is said that even if the other six horses are injured or exhausted, the seventh horse can take the sun's chariot to it's destination" So dare to dream big and reach your destination whatever that may be. US markets were closed yesterday. Today the activity is muted with strength seen in USD index, higher US Treasury yields and domestic rates higher.  Yesterday, LAF injection stood at inr 41k crore with SDF at 105K crore and O/S Repo operations at 146K crore. WACR traded at 6.56% as liquidity tightens on GST outflows. OIS rates are about 1 - 2 bps higher / India 10Y Gsec is trading at 7.38% / Modified Mifor is 3 odd basis higher while forwards are trading ...

 "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...