Weekly Musings – Macro Quartet for the week ending June 28, 2024

1 Jul 2024 , 09:46 AM

CURRENT ACCOUNT SURPLUS GIVES A RUPEE BOOST

For the fourth quarter of FY24 ended March 2024, India reported a current account surplus of $5.7 Billion, which is approximately 0.6% of GDP. Now, if you exclude the pandemic period, this is the first quarterly current account surplus reported by India in the last 18 years, which is commendable. For the full year FY24, the current account deficit was at $23.2 Billion or just about 0.7% of GDP. That is much lower than the 1% CAD expected. The table below captures the full year current account deficit figures.

Pressure on Current Account	Fiscal FY24 Break-up	Fiscal FY23 Break-up	Boost to Current Account	Fiscal FY24 Break-up	Fiscal FY23 Break-up
Trade Deficit	($242.1 bn)	($265.3bn)	Services Surplus	+$162.8 bn	+$143.3 bn
Primary A/C – Interest	($49.8 bn)	($45.9 bn)	Secondary Income	+$105.9 bn	+$100.9 bn
Negative Thrust on CA	(-$291.9 bn)	(-$311.2 bn)	Positive Thrust on CA	+$268.7 bn	+$244.2 bn
		Current Account Surplus / (Deficit)		(-$23.2 bn)	(-$67.0 bn)

Data Source: RBI

With the data available for the full fiscal year FY24, here is a comparison of the current account basket for FY24 and the basket for FY23; with a quick break-up of the factors bringing about this change.

• For FY24, the merchandise trade deficit (trade deficit in physical goods) narrowed yoy to $242.1 Billion compared to $265.3 Billion in FY23. How did that come about? This can be attributed to the discount on Russian oil imports, as Russia had emerged as the largest contributor to the Indian oil basket. This can also be due to the lower commodity prices in the year and the impact on the total imports due to delayed shipments amidst the Red Sea crisis. The good thing is that it has lowered the merchandise trade deficit, which is what matters in the final analysis.
• The bigger story is that the POL deficit has fallen sharply in terms of its share of total merchandise trade deficit. The POL deficit accounted for just about 39.45% of the merchandise trade deficit in FY24, as compared to more elevated levels of 42.18% of the merchandise trade deficit in FY23. The overall trade pressures due to the ongoing Red Sea crisis have been instrumental in reducing the merchandise trade deficit as well as the POL deficit; but Russian oil discounts have also played a key part in the story.
• The more powerful story, and also the proactive story, is on the services surplus front. For FY24, the services surplus stood at $162.8 Billion compared to just $143.3 Billion in the year ago period of FY23. This is despite the services surplus also suffering a minor setback on account of the weak tech demand from the US amidst cuts in tech spending. Remember, IT exports still accounts for bulk of the services trade surplus. However, that has been partially offset by other service outsourcing like global competency centres (GCC), data centres, audit, legal, accounting services etc.
• But the real story was in the higher remittances from expatriate Indians in FY24 as is evident from a reading of the secondary inflows in the year. There was some real good news on the secondary income represented by remittances from abroad. The secondary inflows have increased to $105.9 Billion in FY24 compared to $100.9 Billion in FY23; showing a lot more confidence in the India story.

One of the positive effects of the current account surplus in Q4 and the sharp fall in current account deficit to just 0.7% of GDP for FY25, was that the rupee managed to bottom out and gain some strength. We will come back to that point later.

US BOND YIELDS  HARDEN, AS DOES THE DOLLAR INDEX

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 24, 2024	4.234	4.257	4.277	4.226
Jun 25, 2024	4.248	4.238	4.259	4.209
Jun 26, 2024	4.329	4.244	4.331	4.242
Jun 27, 2024	4.286	4.333	4.347	4.275
Jun 28, 2024	4.392	4.288	4.404	4.261

Data Source: Bloomberg

US bond yields started the week at subdued levels of 4.234%, but gradually edged higher to touch 4.392% levels towards the end of the week. There has been some upwards pressure on the US bond yields after the Fed cuts its rate cut target for 2024 to just one rate cut. It also shows the bond selling impact. A number of traders who had accumulated bonds in the expectations of 3 rate cuts in 2024 are now dumping these bonds in the market. That is leading to a fall in bond prices and spiking the yields. The markets are veering around to the belief that rates will still be cut, and perhaps a lot more aggressive in 2025. However, for now, the best case scenario is 2 rate cuts in 2024 with a probability of under 70%. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 24, 2024	105.121	105.495	105.555	105.015
Jun 25, 2024	105.259	105.175	105.430	105.030
Jun 26, 2024	105.714	105.335	105.790	105.265
Jun 27, 2024	105.571	105.740	105.760	105.375
Jun 28, 2024	105.545	105.565	105.800	105.415

Data Source: Bloomberg

In a week when the bond yields spiked on the back of bond selling pressure, the dollar index strengthened and got closer to the 106 mark. There was a reason for that and it can be largely attributed to the weakness in the Euro, as well as weakness in the other hard currencies. For the week, the dollar index started on a steady note, opening at the 105.121 levels, and stayed in a range. However, on Friday, the dollar index spiked to 105.714 before closing with weekly gains at 105.545 levels. During the week, the dollar index scaled a high of 105.80 and a low of 105.015.

INDIA BOND YIELDS BOUNCE BACK ABOVE THE 7% MARK

After falling below 7% mark in the previous, the benchmark 10-year bond yields stayed persistently below the 7% mark during the week. However, the week to June 28, 2024 saw the bond yield spiking above the 7% mark and closing at 7.008% for the week. That was largely on expectations that the delayed monsoons could result in a spike in inflation.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Jun 10, 2024	7.032	7.048	7.048	7.027
Jun 11, 2024	7.014	7.055	7.055	7.012
Jun 12, 2024	7.012	7.012	7.015	7.007
Jun 13, 2024	6.986	7.003	7.003	6.985
Jun 14, 2024	6.984	6.980	6.991	6.975
Jun 17, 2024	6.984	6.980	6.991	6.975
Jun 18, 2024	6.981	6.998	6.998	6.981
Jun 19, 2024	6.974	6.981	6.981	6.964
Jun 20, 2024	6.976	6.984	6.984	6.970
Jun 21, 2024	6.973	6.984	6.984	6.972
Jun 24, 2024	6.971	6.979	6.979	6.954
Jun 25, 2024	6.983	6.972	6.989	6.969
Jun 26, 2024	6.997	6.998	7.001	6.984
Jun 27, 2024	7.000	7.006	7.009	6.987
Jun 28, 2024	7.008	6.998	7.020	6.992

Data Source: RBI

During the week, the bond yield opened at 6.971% and closed at 7.008%. After the initial jitters, the bond markets are now reconciling to the fact that the delayed monsoons could lead to a spike in food inflation all over again this year. During the week, India 10-year bond yields touched a high of 7.020% and a low of 6.954%. The fiscal deficit is still under check, but food inflation is pushing up the bond yields in the short run.

RUPEE RECOVERS ON GOOD NEWS FROM CAD

With the dollar index spiking to 105.55 levels; the rupee continued to be under pressure, although it did show a later recovery in the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Jun 10, 2024	83.500	83.530	83.551	83.468
Jun 11, 2024	83.600	83.521	83.639	83.480
Jun 12, 2024	83.430	83.618	83.622	83.433
Jun 13, 2024	83.540	83.507	83.575	83.487
Jun 14, 2024	83.547	83.546	83.593	83.514
Jun 17, 2024	83.500	83.523	83.567	83.503
Jun 18, 2024	83.330	83.498	83.560	83.322
Jun 19, 2024	83.460	83.394	83.491	83.340
Jun 20, 2024	83.620	83.422	83.684	83.417
Jun 21, 2024	83.568	83.630	83.631	83.498
Jun 24, 2024	83.450	83.563	83.590	83.410
Jun 25, 2024	83.403	83.439	83.510	83.394
Jun 26, 2024	83.560	83.452	83.632	83.413
Jun 27, 2024	83.438	83.579	83.596	83.408
Jun 28, 2024	83.355	83.458	83.492	83.329

Data Source: RBI

Two weeks back, the rupee weakness was driven by political uncertainty. Last week, the dollar strength against the Euro took the rupee to an all-time low of 83.684/$. This week, the positive cues coming from the current account surplus in Q4 and the lower 0.7% CAD for FY24 managed to strengthen the rupee. Of course, the dollar strength did exert some pressure in the week too. Apart from the dollar strength, the spike in crude prices were also a factor for the rupee. On the positive side for the rupee, FPI inflows have been $4.96 Billion in the last 3 weeks into equities, while the CAD has flattered the street. For the week, the USDINR touched a high of 83.329/$ and a low of 83.632/$.

BRENT CRUDE INCHES CROSSES $85/BBL DECISIVELY

After hovering below $80/bbl for most part of the first week of June, the last 3 weeks saw the oil prices persistently above the $80/bbl. The spike in oil prices mellowed after the US API data. Contrary to expectations of drawdown of -3.000 Million barrels, the week saw addition of +0.914 Million barrels.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Jun 10, 2024	81.63	79.38	82.17	79.34
Jun 11, 2024	81.92	81.97	82.36	81.19
Jun 12, 2024	82.60	82.08	83.34	81.96
Jun 13, 2024	82.75	82.42	83.05	81.80
Jun 14, 2024	82.62	82.05	83.39	81.92
Jun 17, 2024	83.52	82.07	83.79	81.54
Jun 18, 2024	84.53	83.62	84.70	82.97
Jun 19, 2024	84.29	84.61	84.98	84.17
Jun 20, 2024	84.86	84.40	85.14	84.19
Jun 21, 2024	84.33	84.78	85.30	83.95
Jun 24, 2024	86.01	84.99	86.16	84.71
Jun 25, 2024	85.01	86.06	86.23	84.74
Jun 26, 2024	85.25	84.89	85.81	84.47
Jun 27, 2024	86.39	85.01	86.50	84.88
Jun 28, 2024	86.41	86.56	87.22	86.24

Data Source: Bloomberg

Oil prices crossed the $85/bbl mark in the week, although there was some aggressive selling towards the end of trading on Friday. US oil reserves actually saw accretion contrary to expectations of drawdowns. But the real concerns are on the Russia supply cut front. For the week, Brent crude touched a high of $87.22/bbl and a low of $84.47/bbl.

SPOT GOLD FLAT AT $2,326/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)
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
Jun 10, 2024	2,310.53	2,296.00	2,313.87	2,287.31
Jun 11, 2024	2,316.27	2,311.00	2,320.17	2,297.69
Jun 12, 2024	2,322.52	2,315.53	2,341.70	2,310.80
Jun 13, 2024	2,303.54	2,325.70	2,326.70	2,295.68
Jun 14, 2024	2,332.52	2,302.52	2,336.87	2,301.35
Jun 17, 2024	2,318.87	2,332.20	2,333.48	2,310.02
Jun 18, 2024	2,328.33	2,319.38	2,333.25	2,306.63
Jun 19, 2024	2,327.48	2,329.79	2,335.10	2,323.84
Jun 20, 2024	2,359.63	2,329.15	2,365.52	2,327.30
Jun 21, 2024	2,321.51	2,360.91	2,368.77	2,316.82
Jun 24, 2024	2,332.93	2,321.60	2,335.02	2,317.37
Jun 25, 2024	2,319.01	2,333.25	2,337.26	2,315.56
Jun 26, 2024	2,297.91	2,320.00	2,323.95	2,293.70
Jun 27, 2024	2,327.45	2,299.80	2,331.00	2,296.50
Jun 28, 2024	2,325.71	2,327.75	2,339.79	2,319.15

Data Source: Bloomberg

After rallying to above $2,420/oz, gold had fallen two weeks back to $2,292/oz. Gold hardened in the last 2 weeks on hopes that rate cuts would be aggressive in 2025. However, higher gold prices and an unfavourable Gold/Silver ratio is working against a gold rally. During the week, gold touched a high of $2,340/oz and a low of $2,316/oz.