Making Sense

Happy Diwali everyone !!    Additional Meeting of the Monetary Policy Committee for 2022-2023 RBI today slated an additional meeting of the MPC on Nov 3, 2022 u nder the provisions of Section 45ZN of the RBI act. There was a flutter among participants regarding this meeting since it is scheduled immediately after the U.S FOMC Rate decision on Nov 2, 2022.  Provisions  of Section 45ZN of the RBI act pertain to  F ailure to maintain inflation target.-- Where the Bank fails to meet the inflation target, it shall set out in a report to the Central Government-- (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions. Regulation 7 of the RBI MPC and MPR Regulation, 2016 pertain to the requirement for RBI to  send the report to the Central Govern...

  The recent announcement by the OPEC+ to cut oil output by 2mb/d is a big one. The announcement reeks of political leanings as the OPEC+ combined  unanimously  decided  to cut output in a meeting that lasted less than 30 min. Clearly President Joe Biden's visit to Saudi Arabia 3 months back did not yield any dividend. Prince Abdulaziz said the real cuts would be 1.0-1.1 mb/d since OPEC+ failed to meet production targets. OPEC+ production fell about 3.6 mb/d short of its output target in August. Analysts are divided on the actual cuts as  J efferies said they estimated the real cuts at 0.9 mb/d while Goldman Sachs put it at 0.4-0.6 mb/d. **Now the question that comes is can the US balance the market through SPR release? SPR capacity is at 714 million barrels (mb) which will fall to 342 mb after the 180 mb release announced on Mar 31, 22 is complete. Can the administration release more? IEA says  SPR must retain the equivalent of 90 days’ worth of the p...

 India recorded BoP surplus of $ 4.5 bn for Q1 22-23. Current account deficit came in at $ 23.90 bn and capital account recorded a surplus of $ 28 bn explained by short term credit of $ 8.7 bn and $ 19 bn in bank capital. 1.        Merchandise     -68.50 As    Monthly trade deficit for first 5 months is usd 129 bn and for the balance of the year estimated deficit is usd 25 bn pm , then yearly number is likely at usd 300 - 305 bn. 2.        Invisibles           44.66 ( Services        31.71;  Transfers     22.85;  Income        -9.26)       The year end number is estimated at usd 160 bn wherein services surplus could average usd 30 bn pm ( usd 120 bn surplus); transfers at usd 80 bn and income outflow at usd 40 bn. I      Current Ac...

  Federal Reserve Rate decision The overarching theme of the FOMC was price stability and that Federal Reserve would like to see compelling evidence that inflation is moving down, consistently with the 2% inflation target. That would mean a restrictive stance of monetary policy, growth below trend, improved demand supply balance of the labor market. On Sep 21, 22, FOMC raised the Fed funds rate by 75 bps to 3.00 - 3.25%. The committee marked down the GDP projections by 200 bps into 2023, increased expected inflation estimates by 20 bps into 2023 and shifted the terminal rates estimate higher to 4.625% from earlier 3.75%.  The table below captures the change in Fed funds target rate estimates since 2021. The table below implies 125 bps of rate hike in the next 2 policy meetings in Nov and Dec and another 25 bps of rate hikes into Q1 of next year. The market is now pricing 4.67% peak rate by May 2023 and thereafter 33 bps of rate cuts into the Q4 2023.  3.125% ...

The Liquidity Update: The liquidity surplus has turned flat as per the  Money Market Operations report as on Sep 19, 2022. Liquidity surplus has shrunk to 294 crs after the advance tax outflow. The Durable liquidity surplus stands at 342k Crores ( Sep 9, 2022). As the government spends money, the system liquidity surplus will improve. As the liquidity surplus has shrunk, the o/n rates have shot up with o/n call rate touching a high of 5.80% and Cash tom points trading at 0.80 ps. OIS Rates have similarly inched up as global central banks* tighten monetary policy.  1Y OIS 6.75% ( Resistance - 6.88% - 6.95% and then 7.05%) 5Y OIS 6.74% ( Resistance - 6.75% and 6.88% - 7.00%) *  Riksbank hikes its Rate by 100bps to 1.75%.  Inflation continues to be single most important item for CBs. Data released shows  German Producer Prices YY (Aug) rose 45.8% vs. Exp. 37.1% (Prev. 37.2%), MM (Aug) 7.9% vs. Exp. 1.6% (Prev. 5.3%) Whether we get further upside on rates ...

  The Trajectory of interest rates in India is likely to be predicated on the movement of the currency more than the inflation numbers. Inflation appears to have peaked in April 2022 and has declined subsequently. It is likely to trend lower in the coming months - sticky around the 7% level in the months of Aug and Sep and then start declining towards 5.80% in December. I’m generally guided by average of 10y historical mom spreads to outline the trajectory. The risk to inflation come from spike in prices of paddy (10%) and pulses (2%). Liquidity – Liquidity surplus stands at 84K crore ( LAF ) as on aug 17, 2022. The system has a durable liquidity surplus of 464K crore. LAF + Government Cash balance equal durable liquidity, hence government cash balances stand at 380K Crore. The LAF number would improve as RBI starts spending. In the months ahead till December, CIC leakage is estimated at 110K crore - 3% - 3.50% on account of currency leakage during festival season and 2 state...