Making Sense

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 ...

  Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. Refer to earlier article. In the press conference, Fed Chair Jerome had explained the Credit Extensions as Fed is lending to the bridge bank and it’s a loan that’s 100 percent guaranteed by the FDIC so there’s no risk in it for us which I had highlighted in the earlier note too. There is a + USD 42 bn increment in the BTFP and Other Credit extensions has risen by USD 37 Bn. Also the foreign repo facility saw an uptake of USD 60 bn.

"Volatility is an opportunity in disguise." US yields continue to move lower as markets price in 81 bps of rate cuts beginning July 2023 and by end of Dec 2023 to 4.02%. Market pricing is in significant departure from the Fed interest rate guidance of Fed Fund Rate at 5.10% through 2023. Data released yesterday showed Initial jobless claims for the w/e March 18 decreased by 1,000 to 191,000 and continuing jobless claims w/e March 11 increased by 14,000 to 1.694 million. Initial Jobless claims under 200K still denotes a healthy market and shows no signs of strain post the SVB Collapse. Sales of new single‐family houses in February 2023 were at a seasonally adjusted annual rate of 640,000, 1.1% above the revised January rate of 633,000, but is 19.0% below the February 2022 estimate of 790,000.  In yesterday's price action,  US Yields 2Y High low range 25 bps to close the session at 3.81% near lows of 3.76% US Yields 10Y High low range 15 bps to closed the session at 3.40% n...

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. 

 The Federal Reserve announced the FOMC Rate decision by hiking rates by 25 bps as was expected.  Fed introduced a line regarding the current banking crisis assuring the markets of the resilience of the US banking sector The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Interestingly  , the projected path of monetary policy hasn't changed much  The only significant revision to economic projections is in Year 2024 where GDP growth has been knocked off by 40 bps to 1.20% and the Year 2023 has seen a 20 bps hike...

 While we wait for the Fed Rate decision, let's quickly look at the prior economic projections on Dec 15 2022 . The committee will be announcing the interest rate decision today and also release the Statement of economic projections. Between the Policy on Feb 1, 2023 to now, the financial landscape has materially changed following the collapse of 3 US banks and taker over of a Swiss Bank which complicates the task at hand of managing elevated and sticky inflation on the one side and banking crisis on the other hand. Which way will Fed lean will be clear in 5 mins. This blog is with market consensus and expects a 25 bps hike. Markets are pricing in a 83.40% probability for a 25 bps hike in today's policy. US 2Y and US 10Y yields are trading 4.13% and 3.53% respectively. Euro has continued to appreciate and currently trades at 1.0795 and USDJPY at 132.54. Table 1 Economic projections

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 ...

UBS today announced the takeover of Credit Suisse. Swiss Federal Department of Finance, the Swiss National Bank and the Swiss Financial Market Supervisory Authority FINMA (FINMA) all came together to facilitate this takeover. Credit Suisse has been informed by FINMA that FINMA has determined that Credit Suisse’s Additional Tier 1 Capital  (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero.  C redit Suisse and UBS can obtain a liquidity assistance loan with privileged creditor status in bankruptcy for a total amount of up to CHF 100 billion.   Furthermore, and based on the Federal Council’s Emergency Ordinance, the SNB can grant Credit Suisse a liquidity assistance loan of up to CHF 100 billion backed by a federal default guarantee. The structure of the loan is based on the Public Liquidity Backstop (PLB). Write off of AT1 bonds sparked a massive risk aversion across marke...

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...

Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. To put things in perspective, the Primary credit discount window as on 8th March was availed to the extent of USD 4.6 bn which surged to USD 153 bn post the SVB Crisis. If you look at the chart number 1 below, on the left hand side of the chart , you would observe the peak usage before the collapse of SVB Bank to the tune of USD 111 bn as on Oct 29, 2008.  The PPPLF is a covid era measure with nothing home to write about. The BTFP facility which became operational on 13th March 2023 saw usage to the tune of USD 12 bn  (Chart 2) . Other credit extensions rose from zero as on 08th March 2023 to USD 143 bn in the aftermath of the crisis  ...

Risk sentiment stabilised overnight as 11 banks infused USD 30 bn of deposits into First Republic Bank and Treasury Secretary Janet Yellen told the Senate Finance Committee that "Americans can feel confident that their deposits will be there when they need them." US Initial claims for the week ending Mar 11, 23 came in under the 200K level at 192K following a jump last week to 212K which was attributed to mid-winter school break. The steady print shows reluctance among employers to let labor force go. Continuing claims fell to 16.84mn from prior week number of 17.18 mn.  The residential construction report showed stronger than expected construction activity.  Building Permits: 1,52 mn   (prior 1.34 mn) Housing Starts: 1,45 mn  (prior 1.32 mn)  Housing Completions: 1,557,000 (prior 1.39 The interest pricing gyrated with May 23 peak rate seen at 4.95% and dec 23 rate at 4.23% Yields on US Treasuries made low before closing the day higher. 2Y UST touched a low...

"Resilience is the capacity to recover quickly from difficulties; toughness. It is the ability to bounce back from adversity and to keep moving forward towards your goals, despite the obstacles in your path" Yesterday, ECB raised rates by 50 bps as inflation continues to be elevated. Euro area Feb inflation is pretty elevated with inflation running at a hot 8.5%. Acc. to the monetary policy statement, the policy decision will be informed by a data dependent approach which will be guided by three factors: 1. The inflation outlook based on incoming economic and financial data (development in the financial markets, financing, financial cost, terms and conditions and the financing of the economy at large) 2. The dynamics of inflation 3. The strength of monetary policy transmission On the current banking sector stress, ECB expressed confidence that t he euro area banking sector is resilient, with strong capital and liquidity positions and limited exposures to the US institutions....

  "The only limit to our realization of tomorrow will be our doubts of today." Yesterday, US released the Advance Retail Sales data. Adv Retail Sales and Food Services Data fell 0.40% mom against consensus estimates of a 0.30% contraction and following a revised 3.20% in the month of January 2023. Compared to Dec 22, Retail Sales are up 2.81%. The data offers limited insight. US also released the PPI data which fell 0.10% mom against consensus estimates of a rise of 0.30% following a downward revision to the Jan number to 0.30% rise from earlier reported 0.70% rise. This is seen as a welcome moderation in the data. Overnight we saw the market deeply concerned about the contagion risk moving to European Banks. European Banking index was down 8.40% with concerns centred around Credit Suisse. Later, during the day, FINMA and SNB issued a statement expressing comfort on the Credit Suisse capital and liquidity metrics. SNB offered a $ 54 bn covered loan facility to the bank. At th...

India CPI inflation for the month of February came in at 6.44% , marginally lower than 6.52% recorded in the month of January and above my estimates of 6.00% - 6.20%.  Let's quickly crunch the data: Mom headline CPI rose 0.21% . Only F&B (w. 45.86%) recorded negative momentum in prices but the rest of the basket saw mom rises. Housing (w. 10%) was up 0.80% mom; pan, tobacco and intoxicants plus clothing and footwear plus miscellaneous (w. 37% ) was up 0.40%, while food and beverages was down a marginal 0.06% (w. 46%). While declines were recorded in most of the F&B sub components, cereals, milk, spices, prepared mails recorded a rise.  Core CPI continues to be elevated at 6.10%. RBI projects Q4 FY 23 inflation at 5.70%. The Jan and Feb outturn at 6.52% and 6.44% was higher. My own estimates for March 23 inflation are at 5.62% which if the data comes in line will take the quarterly average at 6.16% above RBI's Estimates.  Market is pricing in another 25 bps of rate...

US Treasury, Federal Reserve and FDIC in a joint statement announced decisive steps to protect depositor's money. 1. Depositors will have access to all their money starting Monday, March 13. 2. FDIC will complete the resolution of SVB Bank and any losses associated with the resolution will NOT be borne by the tax payer. However, Shareholders and Unsecured Debt holders will not be protected. 3. A similar resolution was announced for Signature Bank (assets of $ 110 bn) which closed on Sunday. 4. A separate additional funding facility was made available - " Bank Term Funding Program (BTFP)" - to eligible depository institutions to help banks to meet the funding needs of all their depositors.  The facility will offer loans of upto 1Y pledging US Treasuries, Agency Debt, MBS and other qualifying assets. These assets will be valued at par. 5. Treasury made available $ 25 bn from the Exchange Stabilization fund as a backstop to BTFP.  The risk sentiment recovered with S&P fu...