Weekly Musings – Macro Quartet for the week ending June 07, 2024

9 Jun 2024 , 11:24 AM

WHAT WE READ IN THE RBI MONETARY POLICY

If you leave the coalition politics story aside, the big even in the week was the RBI monetary policy presented on Friday. After 3 days of deliberations, the RBI finally decided to maintain status quo on rates. However, there appears to be some trends emerging from the deluge of data points we see in the RBI monetary policy. Of course, we will get a granular idea of the individual arguments only when the minutes are out after 15 days, but here is what we read from the RBI policy statement.

• Based on a majority of 4:2, the RBI Monetary Policy Committee (MPC) decided to hold repo rates steady at 6.50%. That keeps the linked rates also at the same level. For instance, the reverse repo rate (SDF rate) stays at 6.25% while the MSF rate and the bank rate stays put at 6.75%. In addition, the RBI also decided to keep the stance of the monetary policy at “gradual withdrawal of accommodation.” What is interesting is that there were two dissenting voices this time around. Jayanth Varma and Ashima Goyal voted to reduce the repo rates by 25 bps as a pre-emptive rate cut. Even on the subject of the RBI monetary stance, Jayanth Varma and Ashima Goyal voted to change the stance of the policy to “Neutral,” so it is more in sync with market realities.
• After a year of deficit liquidity, the liquidity situation moved back to surplus in early June 2024. The RBI continued to aggressively use Variable Rate Reverse Repos (VRRR) to mop up surplus liquidity and variable rate repos (VRR) to infuse liquidity into the system. In recent times, the RBI has underlined that the current just-in-time (JIT) cash management system followed by the government was making Indian banks more vulnerable to government liquidity flows. That really does not have any resolution in sight for the time being. Due to this factor, the RBI expects liquidity conditions to be erratic.
• In line with the street expectations, the RBI did raise the GDP forecast for FY25. However, here again, the RBI MPC opted to err on the side of caution, raising the GDP growth estimate by just 20 bps. The market expectation was that the RBI would upgrade the GDP forecast for FY25 by 50 bps from 7.0% to 7.5%. However, the RBI MPC decided to just hike the GDP forecast by 20 bps from 7.0% to 7.20%. That was a case of being too conservative, especially considering the healthy ICOR (incremental capital output ratio) at around 3.5X. The MPC was obviously waiting for more cues on agricultural output.
• On the inflation front, the RBI MPC pegs the risks to be evenly balanced. While normal monsoons were supposed to be taper food prices, the Kharif output was still the X-factor, as it depended on factors other than just the quantum of rain. Also, Red Sea crisis was still a festering problem but with oil falling below $80/bbl, the risks are substantially lower. Overall, the RBI decided to maintain the inflation estimates at 4.5% for FY25.
• The dissenting note by Ashima Goyal and Jayanth Varma indicate that the RBI did have an opportunity to undertake a pre-emptive rate cut in this policy by 25 basis points. There were several triggers for a possible rate cut. For instance, the repo rate is around 135 bps above the pre-COVID rate and also the real rates of return on the 10-year benchmark bond are more than 2% net of inflation. The fourth quarter, Q4FY24, also saw pressure on corporate bottom lines due to higher interest costs. Despite these rather compelling factors, the RBI chose to hold status quo on rates. Apparently, the RBI was playing safe due to the impending formation of a coalition government as well as the full budget being presented only in July 2024.

Globally, signals are that ECB has shifted from restrictive monetary policy to accommodative monetary policy. However, the RBI may still want to see the Fed acting decisively, and that does not see too likely at this juncture.

US BOND YIELDS  AND DOLLAR INDEX – CALL IT THE FRIDAY EFFECT

Two macro variables that set the tone for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 03, 2024	4.392	4.493	4.501	4.390
Jun 04, 2024	4.330	4.396	4.414	4.314
Jun 05, 2024	4.277	4.330	4.359	4.275
Jun 06, 2024	4.287	4.289	4.322	4.275
Jun 07, 2024	4.433	4.293	4.436	4.289

Data Source: Bloomberg

US bond yields started the week at subdued levels of 4.392%, but gradually edged lower to touch 4.277% levels during the middle of the week. However, US bond yields spiked on Friday from 4.287% to 4.433%, after the US non-farm payrolls data showed fresh jobs at 2,72,000 in May 2024, against 1,65,000 last month and street expectations of 1,90,000  in May 2024. Post these macro data flows, the bond yields surged sharply on Friday. This raised hopes of strength in the US economy. This virtually ruled out rate cuts in July and even reduced the probability of rate cuts in September, resulting in a spike in bond yields. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 03, 2024	104.14	104.63	104.77	104.04
Jun 04, 2024	104.11	104.05	104.33	103.99
Jun 05, 2024	104.27	104.17	104.46	104.13
Jun 06, 2024	104.10	104.25	104.37	104.05
Jun 07, 2024	104.89	104.09	104.95	104.00

Data Source: Bloomberg

Like the US bond yields, even the dollar index (DXY) spiked on Friday after the stronger than expected non-farm payrolls data. For the week, the dollar index started on a steady note, opening at the 104.14 levels, and stayed in a range. However, on Friday, the dollar index spiked from 104.10 to 104.89; a sharp move in just one day. During the week, the dollar index scaled a high of 104.95 and a low of 103.99. This is largely a bet on rates remaining higher for longer.

INDIA BOND YIELDS BOUNCE ABOVE THE 7% MARK

After falling below 7% mark in the last 2 weeks, the benchmark 10-year bond yields bounced back above the 7% mark, and closed at 7.018%. In the latest week to June 07, 2024, the bond yields closed above the 7% mark for the last 4 days in a row.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 13, 2024	7.116	7.134	7.134	7.114
May 14, 2024	7.109	7.123	7.123	7.105
May 15, 2024	7.086	7.103	7.103	7.082
May 16, 2024	7.076	7.058	7.082	7.055
May 17, 2024	7.095	7.084	7.099	7.080
May 20, 2024	7.078	7.101	7.101	7.069
May 21, 2024	7.078	7.101	7.101	7.069
May 22, 2024	6.997	7.053	7.053	6.993
May 23, 2024	6.997	7.053	7.053	6.993
May 24, 2024	6.998	6.997	7.001	6.985
May 27, 2024	6.981	7.016	7.016	6.967
May 28, 2024	6.995	6.981	6.998	6.971
May 29, 2024	7.008	7.020	7.020	6.987
May 30, 2024	7.003	7.022	7.022	6.995
May 31, 2024	6.986	6.991	6.994	6.980
Jun 03, 2024	6.947	6.955	6.963	6.945
Jun 04, 2024	7.033	6.955	7.062	6.951
Jun 05, 2024	7.026	7.034	7.054	7.023
Jun 06, 2024	7.015	7.020	7.023	7.013
Jun 07, 2024	7.018	7.020	7.036	7.005

Data Source: RBI

During the week, the bond yield opened at 6.947% and closed at 7.018%. The sharp spike in bond yields was on the back of fears that the pressures of coalition politics could once again spike the fiscal deficit. During the week, India 10-year bond yields touched a high of 7.062% and a low of 6.945%.

RUPEE WEAKENS TO 83.52/$ AMIDST COALITION WORRIES

With the dollar index spiking to 104.89 levels; the rupee weakened to 83.521/$, despite the weak crude oil prices.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
May 13, 2024	83.506	83.525	83.618	83.481
May 14, 2024	83.482	83.529	83.550	83.472
May 15, 2024	83.414	83.524	83.595	83.355
May 16, 2024	83.450	83.420	83.524	83.404
May 17, 2024	83.302	83.470	83.507	83.260
May 20, 2024	83.280	83.302	83.328	83.224
May 21, 2024	83.250	83.297	83.373	83.226
May 22, 2024	83.220	83.324	83.328	83.210
May 23, 2024	83.240	83.286	83.322	83.190
May 24, 2024	83.060	83.285	83.300	83.018
May 27, 2024	83.102	83.070	83.147	83.034
May 28, 2024	83.160	83.137	83.209	83.103
May 29, 2024	83.340	83.197	83.411	83.172
May 30, 2024	83.280	83.363	83.442	83.246
May 31, 2024	83.424	83.321	83.501	83.235
Jun 03, 2024	83.083	83.124	83.188	82.952
Jun 04, 2024	83.524	83.120	83.676	83.085
Jun 05, 2024	83.370	83.539	83.585	83.277
Jun 06, 2024	83.466	83.390	83.527	83.357
Jun 07, 2024	83.521	83.472	83.529	83.365

Data Source: RBI

The weakness in the rupee during the week was largely driven by political uncertainty and pressures of coalition politics. However, the FPI selling of $1.78 Billion in the week also played a part in the rupee weakness. For the week, rupee touched a high of 82.952/$ and a low of 83.676/$. The currency was seen extremely volatile against the US dollar on Tuesday, when the election outcome was released and the trend was clearly towards the BJP falling short of majority and relying on allies for support. Strong dollar also spoilt the show.

BRENT CRUDE TAPERS TO $79.62/BBL ON SUPPLY EXPECTATIONS

Since touching a high of $90/bbl, crude has been steadily tapering. After hovering in the range of $81/bbl to $83/bbl for 3 weeks in a row, Brent Crude prices fell below $80/bbl for the first time this year since February 2024. The OPEC is expected to boost supplies in the second half of 2024 to capitalize on high prices.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
May 13, 2024	83.36	82.78	83.84	82.26
May 14, 2024	82.78	83.43	83.62	82.11
May 15, 2024	82.75	82.76	83.07	81.05
May 16, 2024	83.27	83.03	83.78	82.31
May 17, 2024	83.96	83.45	84.04	83.08
May 20, 2024	83.71	83.98	84.49	83.11
May 21, 2024	82.88	83.75	83.76	82.04
May 22, 2024	81.90	82.58	82.63	81.57
May 23, 2024	81.36	81.59	82.97	80.93
May 24, 2024	82.12	81.40	82.46	80.65
May 27, 2024	83.10	82.20	83.20	82.08
May 28, 2024	84.22	83.00	84.62	83.00
May 29, 2024	83.60	84.61	85.02	83.29
May 30, 2024	81.86	83.51	83.77	81.80
May 31, 2024	81.62	81.74	82.18	81.17
Jun 03, 2024	78.36	81.15	81.65	78.09
Jun 04, 2024	77.52	78.14	78.22	76.76
Jun 05, 2024	78.41	77.29	78.66	77.18
Jun 06, 2024	79.87	78.70	80.08	78.38
Jun 07, 2024	79.62	80.05	80.38	79.32

Data Source: Bloomberg

Oil prices fell further in the week to $79.62/bbl with the US inventories showing an increase of 1.233 Million barrels; against expectations of drawdown of -2.100 Million barrels. Also, the OPEC is likely to go slow on supply cuts in H2-2024. For the week, Brent crude touched a high of $81.65/bbl and a low of $76.76/bbl.

SPOT GOLD EASES LOWER TO $2,293/OZ

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

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
May 13, 2024	2,338.45	2,360.38	2,364.56	2,332.38
May 14, 2024	2,355.88	2,338.39	2,359.66	2,334.94
May 15, 2024	2,386.04	2,358.20	2,390.36	2,351.82
May 16, 2024	2,377.90	2,391.93	2,397.40	2,371.10
May 17, 2024	2,414.89	2,376.81	2,422.87	2,373.96
May 20, 2024	2,425.12	2,415.02	2,450.13	2,407.34
May 21, 2024	2,421.64	2,426.84	2,434.00	2,406.32
May 22, 2024	2,378.25	2,423.75	2,426.64	2,374.98
May 23, 2024	2,328.37	2,378.60	2,383.86	2,327.00
May 24, 2024	2,333.76	2,328.40	2,347.54	2,325.40
May 27, 2024	2,350.74	2,334.50	2,358.56	2,332.36
May 28, 2024	2,360.95	2,352.29	2,364.12	2,340.17
May 29, 2024	2,338.77	2,361.00	2,362.86	2,334.75
May 30, 2024	2,343.00	2,339.67	2,351.83	2,322.72
May 31, 2024	2,326.97	2,345.07	2,353.24	2,323.96
Jun 03, 2024	2,350.35	2,329.61	2,354.82	2,314.76
Jun 04, 2024	2,327.68	2,349.00	2,351.76	2,315.53
Jun 05, 2024	2,354.78	2,328.00	2,358.07	2,325.88
Jun 06, 2024	2,375.61	2,355.16	2,378.57	2,353.60
Jun 07, 2024	2,292.71	2,376.50	2,387.85	2,286.77

Data Source: Bloomberg

After rallying to above $2,420/oz, gold has fallen sharply to below the $2,300/oz this week as strong US jobs data suggests that rates may stay higher for longer. That means; opportunity cost of holding gold will remain high. During the week, gold touched a high of $2,388/oz and a low of $2,286/oz. The next move in gold may be triggered by Fed rate action; and that looks unlikely before September 2024.