Making Sense

 Fx Data As on 30 Sep 22, India Fx reserves declined to $ 533 bn from a peak of $ 642 bn ( Oct 21), a decline of $ 109 bn.  RBI Sep Spot intervention was to the tune of $ 33 bn. RBI's forward book is not part of the Fx reserves. Hence, it could be inferred that the decline in Fx reserves to the tune of $ 33 bn was on account of intervention and the balance $ 76 bn was on account of valuation swings. The above ties in when the RBI Governor had said in September that 67% of the drop in forex reserves was on account of valuation swings.  Looking at the forward book, RBI Sep forward intervention was to the tune of $ 10 bn. FYTD Sep, forward book intervention stands at $ 55 bn and outstanding RBI forward book now stands at $ 10 bn.  FYTD Sep, RBI intervention stands at $ 89 bn. 

 India Oct trade deficit data came in at $ 26.91 bn. FY 22 - 23 till Oct came in at $ 183 bn.  Exports peaked in the first quarter of FY 22 - 23 and have steadily declined in line with a subdued global outlook. Exports contracted 9% mom to $ 29.78 bn while imports contracted 4% to $ 56.69 bn. Fall in exports was largely driven by  cotton yarn/handloom, gems and jewellery exports, and engineering goods. The Oct estimated services surplus came in at $ 12.28 bn and trade balance therefore stands at $ 14.63 bn. 

 Hello everyone !! India CPI and WPI data release shows CPI easing to 6.77 % (prior 7.41%) and WPI easing to 8.39% ( prior 10.70%). The CPI release looks in line with RBI's delineated path with 6.50% print for Q3 but the Q4 prints could average 6.05% according to my estimates and inflation could ease below 5% from start of next fiscal year on higher base effects.   We continue to be watchful of rise in cereal prices. Decline in paddy acreage due to unseasonal rains, elevated wheat prices alongside lower stocks government warehouses (50% less than last year) continue to pose risk to inflation outlook. Sowing for the rabi season has been encouraging which could bode well for the inflation trajectory to evolve along expected lines.  Liquidity is in small surplus with liquidity absorption at Inr 66K crore and call rates trading closer to the repo rate at 5.90% and daily Cash tom points falling to 0.50 ps. Benign liquidity conditions and easing inflation favor the receive...

 Release of the US CPI print was the single most important event for financial markets. Yesterday's release showed moderation with headline print at 7.70% yoy (prior 8.20%), 0.40% mom (prior 0.40%) and Core CPI at 6.30% (prior 6.60%).  The data release confirmed few narratives. The June print of 9.1% CPI marked the peak in inflation and FOMC will slow the pace of rate hikes. Market is now pricing in the terminal rate at 4.92%. Post the FOMC , mkt had priced in a peak terminal rate of 5.25%. Interestingly, there has been extensive talk on the Shelter component of US CPI which measures rental values / imputed rent (owners' equivalent rent) and lodging away from home. Though the shelter component rose 0.80% mom, the sticky OER component rose 0.60% (prior 0.80%) which is a welcome sign. The markets went into a frenzy mode or may be long liquidation mode. USD fell across the board, bonds rose and equities rose. Also aiding the sentiment was China adjusting protocols for covid contr...

Market estimate of Oct inflation as per Reuters poll is 6.73% with estimates ranging between 6.40% - 7.35%. My own estimates show the inflation print to be 6.60% based on average mom trend over the last decade. A print of 6.56% will be considered benign. A print lower than 6.70% will suggest inflation to evolve along RBI suggested rate trajectory with Q3 averaging 6.50% and then decline by March below the 6.00% level. My concern emanates from a print closer to 7% where RBI would be forced to raise rates by 50 bps in December meeting and the market would be quick to price terminal rate at 7% instead of the current 6.75%.  Considering no commodity shock and lower inflation on seasonality trends , interest rate markets have shown receiving interest over the last month.  We keep a close eye on CPI inflation data to see if more hawkishness needs to be built in to the price. Remember,  I have been mentioning that more hawkishness will be a function of how usdinr behaves as abse...

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 ...