Weekly Musings – Macro Quartet for the week ending September 08, 2023

11 Sep 2023 , 06:43 AM

It was another mixed show by the macro quartet for the week ended September 08, 2023. Bond yields were flat to weak while gold prices trended lower. However, from an Indian macro perspective, there was visible pressure on crude oil prices and the Indian rupee. During the week, crude rallied to above $90/bbl on fears that the supply crunch could only get worse amidst robust oil demand. Better than expected growth numbers globally also helped this perception. At the same time, the dollar index continues to remain strong above the 105 levels on hopes of the Fed hiking rates, sooner rather than later. In a sense, oil and USDINR moves were negative for the Indian economy during the week. Higher crude prices (now up nearly 30% in 3 months) hints at a widening trade deficit and current account deficit. A weaker rupee makes imports more expensive, paving the way for imported inflation. It also discourages FPI flows on concerns over defending dollar returns.

BUT, BOND YIELDS AND GOLD PRICES STAY SUBDUED

Even as the action gravitated towards oil and the USDINR during the week, the other two parts of the quartet; bond yields and gold prices were relatively subdued. The bond yields almost closed at the same level as the previous week. While higher inflation continues to be an overhang on the 10-year benchmark bond yields, liquidity management has come to the rescue in the week. The week saw the RBI announcing the phased withdrawal of the I-CRR, which is likely to boost liquidity in the money markets. Gold, on the other hand, was more of a dollar play. Gold prices had bounced from below the $1,900 levels in recent weeks, but it faced pressure this week as the dollar strengthened. The strong dollar works against gold prices as gold tends to be denominated in dollars. Also, with the news flows on the macro front improving, the need for safe haven investing appears to be reducing. That is not great news for gold prices.

BOND YIELDS STAY FLAT AT 7.18% IN THE WEEK TO SEPTEMBER 08, 2023

The bond yields remained flat to marginally positive during the week. The 10-year benchmark bond yields oscillated between 7.17% to 7.21% with the yields largely gravitating towards the 7.20% levels during the week. This trend of flat yields has continued for the second week in succession. The logical assumption would be that higher inflation would lead to higher bond yields. However, that has not been the case as Indian markets are still betting that, RBI may plump for enhancing growth rather than obsessing with inflation. That has kept bond yields subdued. Also, the RBI has decided to tone down its aggressive liquidity control strategies. In a positive gesture for the banking sector, the RBI announced phased withdrawal of the Incremental CRR (I-CRR) of 10% that was imposed in the August 2023 monetary policy. This is likely to bring back liquidity into the system and make available more funds for banks to on-lend. That also subdued yields on bonds.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 14, 2023	7.209	7.226	7.226	7.205
Aug 15, 2023	7.209	7.226	7.226	7.205
Aug 16, 2023	7.209	7.226	7.226	7.205
Aug 17, 2023	7.250	7.252	7.256	7.243
Aug 18, 2023	7.214	7.240	7.241	7.209
Aug 21, 2023	7.220	7.233	7.233	7.210
Aug 22, 2023	7.218	7.244	7.244	7.211
Aug 23, 2023	7.194	7.222	7.222	7.193
Aug 24, 2023	7.193	7.178	7.197	7.175
Aug 25, 2023	7.206	7.241	7.241	7.198
Aug 28, 2023	7.178	7.212	7.212	7.166
Aug 29, 2023	7.180	7.178	7.189	7.159
Aug 30, 2023	7.185	7.153	7.192	7.153
Aug 31, 2023	7.166	7.177	7.186	7.164
Sep 01, 2023	7.175	7.174	7.184	7.163
Sep 04, 2023	7.204	7.192	7.206	7.186
Sep 05, 2023	7.206	7.210	7.211	7.195
Sep 06, 2023	7.210	7.217	7.232	7.209
Sep 07, 2023	7.173	7.229	7.229	7.158
Sep 08, 2023	7.199	7.183	7.207	7.165

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.175%. However, it opened the latest week at 7.204% and stayed around the 7.17%-7.21% range through the week. Eventually, the bond yields closed at 7.199%, almost where it had started the week. Inflation remains an overhang, but the market interpretation appears to be that inflation in India is more of a temporary phenomenon and should abate once the Kharif output starts hitting the mandis. That is one reason why the bond yields don’t betray any sense of panic. Today, the RBI appears to be more concerned about its GDP target, so it does not lose the mantle of being the fastest growing large economy in the world. With GDP and core sector growth holding up, the RBI is a lot more confident that inflation should taper and growth should continue; which is why the RBI may hold rates despite rising inflation. In addition, the I-CRR will be withdrawn in a phased manner; and that is keeping yields quiet. 

RUPEE ENDS WEEK TO SEPTEMBER 08, 2023 ABOVE 83/$

The last two weeks of August had seen the rupee consistently above 83/$, but RBI intervention helped the rupee to recover to below 83/$. However, the pressure this week has once again pushed the dollar beyond 83/$, where it sustained through the week and even closed above that level. This has partly to do with the strength in the US dollar, which is reflected in the dollar index (DXY) holding above 105 levels. DXY is a dollar barometer against a basket of hard currencies and the dollar strength is putting pressure on the Indian rupee. Last week, there was substantial RBI intervention, which resulted in the rupee closing below the 83/$ mark. But, the RBI intervention means it has to sell dollars in the spot market to boost the rupee. While it does help to support the rupee, it results in higher rupee liquidity in the economy and also results in a sharp fall in the dollar reserves of the RBI. Hence, the RBI tends to use this intervention facility more sparingly. However, crude rallying to above $90/bbl has also put pressure on the Indian rupee and weak FPI flows in August and FPI outflows in September 2023 are not helping the cause. 

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Aug 14, 2023	83.170	82.895	83.301	82.895
Aug 15, 2023	83.212	83.185	83.467	83.170
Aug 16, 2023	83.209	83.240	83.443	83.085
Aug 17, 2023	83.130	83.222	83.268	82.989
Aug 18, 2023	83.157	83.099	83.276	82.983
Aug 21, 2023	83.090	83.193	83.217	83.021
Aug 22, 2023	83.040	83.113	83.122	82.909
Aug 23, 2023	82.508	83.082	83.090	82.449
Aug 24, 2023	82.580	82.579	82.646	82.359
Aug 25, 2023	82.637	82.605	82.740	82.532
Aug 28, 2023	82.600	82.585	82.662	82.527
Aug 29, 2023	82.574	82.646	82.842	82.576
Aug 30, 2023	82.607	82.593	82.819	82.568
Aug 31, 2023	82.702	82.678	82.799	82.582
Sep 01, 2023	82.689	82.647	82.784	82.576
Sep 04, 2023	82.715	82.670	82.785	82.650
Sep 05, 2023	83.033	82.753	83.097	82.712
Sep 06, 2023	83.197	83.075	83.258	82.986
Sep 07, 2023	83.150	83.220	83.271	83.076
Sep 08, 2023	83.004	83.133	83.184	82.902

Data Source: RBI

During the current week, the dollar index (DXY) gained 81 bps to the 105.06 levels. This dollar strength, led to the rupee persistently weaker than 83/$ during the week. One thing is clear that while the RBI will continue to intervene to shore up the rupee, it would be more of a calibrated move. RBI could have some tough choices to make in the coming days.

BRENT CRUDE RALLIES ABOVE $90/BBL ON SUPPLY CONCERNS

If Brent Crude had been threatening to breach above $90/bbl in the last few weeks, this week actually saw it happen. Crude closed above the psychological $90/bbl mark and WTI crude is now above $87/bbl. In the last few weeks, Russian oil minister, Alexander Novak, has been hinting at more supply cuts in tandem with the OPEC. Combined with robust demand levels, it looks like oil could now be headed towards the $100/bbl; a level that normally gets the Indian policy makers relatively jittery US crude inventories continue to remain under pressure, putting further strain on the Brent Crude prices.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Aug 14, 2023	86.21	86.53	86.71	85.50
Aug 15, 2023	84.89	86.12	86.68	84.29
Aug 16, 2023	83.45	85.20	85.36	83.13
Aug 17, 2023	84.12	83.20	84.88	83.05
Aug 18, 2023	84.80	83.88	85.08	83.33
Aug 21, 2023	84.46	84.80	85.86	84.31
Aug 22, 2023	84.03	84.46	84.66	83.85
Aug 23, 2023	83.21	83.99	84.26	81.94
Aug 24, 2023	83.36	82.95	83.62	81.97
Aug 25, 2023	84.48	83.26	84.97	82.67
Aug 28, 2023	84.42	84.87	85.23	84.11
Aug 29, 2023	85.49	84.39	85.65	83.80
Aug 30, 2023	85.86	85.62	86.23	85.11
Aug 31, 2023	86.83	85.22	86.88	85.08
Sep 01, 2023	87.80	86.22	88.19	86.15
Sep 04, 2023	89.00	88.95	89.22	88.26
Sep 05, 2023	90.04	88.91	91.15	88.06
Sep 06, 2023	90.60	90.12	91.10	89.25
Sep 07, 2023	89.92	90.81	90.89	89.46
Sep 08, 2023	90.65	89.79	91.02	89.30

Data Source: Bloomberg

It is not too clear, what is the story of oil on the demand side. In the past, demand has been the joker in the pack. However, recent indications from growth and jobs are that normal growth is coming back and oil demand may surge from here. Even a slowing Chinese economy may have enough ammunition keep oil demand robust. Hence, the deciding pivot for oil prices would still be the supply side story; and that favours the OPEC and Russia.

GOLD PRICES TAPER ON STRONG DOLLAR IN THE WEEK

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Aug 14, 2023	1,907.90	1,913.67	1,916.55	1,902.20
Aug 15, 2023	1,901.56	1,907.40	1,912.19	1,896.15
Aug 16, 2023	1,891.76	1,901.59	1,907.90	1,891.30
Aug 17, 2023	1,888.89	1,892.20	1,903.90	1,884.50
Aug 18, 2023	1,889.42	1,891.35	1,896.87	1,886.84
Aug 21, 2023	1,893.94	1,889.40	1,899.05	1,884.50
Aug 22, 2023	1,897.00	1,895.09	1,905.05	1,888.60
Aug 23, 2023	1,914.31	1,897.80	1,920.94	1,897.23
Aug 24, 2023	1,916.60	1,914.15	1,923.94	1,911.35
Aug 25, 2023	1,914.53	1,917.80	1,923.09	1,903.40
Aug 28, 2023	1,919.66	1,916.09	1,926.19	1,912.83
Aug 29, 2023	1,937.12	1,920.23	1,938.41	1,914.00
Aug 30, 2023	1,942.24	1,937.48	1,949.04	1,934.94
Aug 31, 2023	1,939.74	1,942.61	1,948.19	1,938.86
Sep 01, 2023	1,938.80	1,940.19	1,953.44	1,934.59
1,938.19	1,940.49	1,946.42	1,936.15	1,938.19
1,925.81	1,938.59	1,939.13	1,925.22	1,925.81
1,916.28	1,926.16	1,929.80	1,914.80	1,916.28
1,919.19	1,916.86	1,923.67	1,916.10	1,919.19
1,917.81	1,919.57	1,930.19	1,917.36	1,917.81

Data Source: Bloomberg

The gold price bounce of the previous 2 weeks proved to be short-lived as dollar strength once again subdued gold prices. In the last 2 weeks, spot gold prices had bounced from $1,889/oz to $1,939/oz. In the latest week, the price of spot gold tapered to $1,919/oz. Gold has been struggling in a range for a long time and it looks unlikely that it can effectively break out ither ways, in the absence of strong triggers. For now, it is the strong dollar and expectations of higher interest rates that is keeping gold subdued.

What is the outlook in the coming week. With the RBI likely to relent on liquidity control, we could see further tapering of yields. Of course, it still predicates on whether there is any inflation surprise. Global oil prices remain the big X-factor and for now, the equations are loaded in favour of the oil suppliers; and India is not one of them.