Weekly Musings – Macro Quartet for the week ending May 24, 2024

27 May 2024 , 10:23 AM

RECORD RBI DIVIDEND PULLS DOWN INDIA BOND YIELDS

The big news for the week was the bumper dividend (capital distribution declared by the RBI to the government of India for fiscal year FY24. It must be noted here that the dividend that RBI declares for FY24 becomes part of the revenues of the government for FY25. For FY24, the RBI has paid ₹2.11 Trillion as dividend to the government. This is not only the highest payout ever, but also more than twice the estimate of ₹1.02 Trillion put out in the Interim Budget presented on February 01, 2024. However, this ₹1.02 Trillion includes the dividends paid by PSU banks also, so the actual positive gap is much higher. The table below captures the RBI distribution to the government over the last 7 years.

Financial Year	RBI Dividend (₹ in Crore)	YOY Change (%)
Fiscal Year 2017-18	50,000
Fiscal Year 2018-19	1,75,988	251.98%
Fiscal Year 2019-20	57,128	(67.54%)
Fiscal Year 2020-21	99,122	73.51%
Fiscal Year 2021-22	30,307	(69.42%)
Fiscal Year 2022-23	87,416	188.44%
Fiscal Year 2023-24	2,10,874	141.23%

Data Source: RBI (negative figures in brackets)

One must admit that this higher payout by the RBI will come as a blessing to the government when it presents the full budget in July 2024. There is the additional buffer of more than ₹1 Trillion they will be playing with. But the key question is two-fold. Firstly, why did the bond yields fall sharply and secondly what can the government do now?

WHAT CAN THE GOVERNMENT DO WITH THE RBI LARGESSE

Let us look at why the bond yields fell to below 7% first. Clearly, an accretion of more than ₹1.20 Trillion to the revenue flows for the financial year gives the government the leeway to reduce its fiscal deficit. That could lead to a corresponding fall in the borrowing program, putting less pressure on the bond markets. That way, private issuers of debt will not be crowded out and the bond yields will remain in check. That brings us to the next logical question; what can the government do with these additional funds in a way that it would be value accretive for the Indian economy?

S&P had rightly pointed out that how the government utilizes the RBI largesse would go a long way in determining the way the impact would be seen. Broadly, there are two productive ways in which the government can utilize the RBI dividend bonanza.

• One way to use the extra money is to surprise the market with a final fiscal deficit target of less than 5% of GDP. That is likely to please the domestic and the global investors, apart from the rating agencies. The interim budget had reduced the fiscal deficit for FY24 from 5.9% to 5.8%. For FY25, the government had sharply cut the fiscal deficit target to 5.1% of GDP. Assuming that the additional dividend was not factored into the calculations, the government can use this extra money to push down the fiscal deficit to below 5% of GDP for FY25, so that 4.5% target in FY26 looks more achievable.
• The other option is that the government may look to not tinker with the fiscal deficit at 5.1% of GDP but instead enhance the capex outlay. After growing capex outlay by 30% in FY23 and FY24, the FY25 growth in capex was pegged at 11%. This additional money can be used to grow the capex outlay by 20% instead of 11%. That would also be value accretive from the Indian economy perspective.

As of now, politics is still in a state of flux. We are not sure of the nature and colour of the new government on June 04, 2024. For now, we must keep our fingers crossed. Surely, the RBI bonanza has given an opportunity for the government to underline its credentials as a champion of growth as well as a strong believer in fiscal prudence. It needs to be seen, which path the government eventually chooses to take.

US BOND YIELDS EDGE HIGHER; DOLLAR INDEX STILL BELOW 105

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 (%)
May 20, 2024	4.447	4.414	4.455	4.406
May 21, 2024	4.412	4.445	4.451	4.398
May 22, 2024	4.426	4.414	4.461	4.410
May 23, 2024	4.479	4.426	4.498	4.408
May 24, 2024	4.467	4.477	4.502	4.463

Data Source: Bloomberg

US bond yields started the week at subdued levels of 4.447%, but gradually edged higher to close the week at 4.467%. During the week, the US 10-year bond yields touched a high of 4.502 and a low of 4.398%. Compared to the previous week, the US bond yields were equally volatile, albeit in a range. While hawks in the Fed are sceptical about rate cuts in 2024, Powell has hinted that the probability of a rate cut was higher than the probability of a rate hike. The first rate cut is likely to happen in the US only in September 2024. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 20, 2024	104.57	104.50	104.65	104.39
May 21, 2024	104.66	104.60	104.77	104.48
May 22, 2024	104.93	104.62	104.97	104.56
May 23, 2024	105.11	104.90	105.11	104.63
May 24, 2024	104.72	105.04	105.12	104.64

Data Source: Bloomberg

The dollar index was  actually higher week on week. It stayed below the 105 levels during the week after the FOMC minutes were announced. The dollar index started the week on a steady note, opening at the 104.57 levels but closed higher at 104.72 levels. The spike was sharp in the first 4 days, but tapered on Friday. During the week, the dollar index scaled a high of 105.12 and a low of 104.39. The dollar index has now stayed below the 105 mark for two weeks in a row.

INDIA BOND YIELDS FALL SHARPLY TO 6.998%

After spiking for 3 weeks in a row, the bond yields fell sharply to below the 7% mark, and closed at 6.998% for the week. The sharp fall in the bond yields was largely driven by the larger than expected dividend paid out by the RBI to the government.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 29, 2024	7.196	7.185	7.203	7.176
Apr 30, 2024	7.195	7.199	7.205	7.185
May 01, 2024	7.195	7.199	7.205	7.185
May 02, 2024	7.162	7.170	7.173	7.159
May 03, 2024	7.149	7.160	7.163	7.147
May 06, 2024	7.108	7.132	7.132	7.106
May 07, 2024	7.129	7.115	7.135	7.109
May 08, 2024	7.138	7.138	7.144	7.130
May 09, 2024	7.135	7.148	7.148	7.125
May 10, 2024	7.127	7.124	7.129	7.111
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

Data Source: RBI

During the week, the bond yield opened at 7.078% and closed at 6.998%. This is the first time in the calendar year 2024 that the bond yields have fallen below the 7% mark. In the last 4 weeks, the benchmark Indian bond  yields fell from 7.196% to 6.998%. The sharp fall in the bond yields this week was on account of the larger than expected dividend payout by the RBI to the government, which has the potential to sharply reduce the fiscal deficit. During the week, India 10-year bond yields touched a high of 7.101% and a low of 6.985%.

RUPEE HARDENS TO 83.060/$; AS FPI FLOWS TURN POSITIVE

With the dollar index at 104.72 levels, and the crude oil prices edging lower to $82.12/bbl, the rupee ended stronger at 83.06/$. FPIs were net buyers worth $744 Million in the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Apr 29, 2024	83.410	83.385	83.513	83.352
Apr 30, 2024	83.450	83.459	83.537	83.397
May 01, 2024	83.455	83.474	83.532	83.446
May 02, 2024	83.435	83.430	83.503	83.401
May 03, 2024	83.382	83.404	83.474	83.316
May 06, 2024	83.475	83.380	83.603	83.380
May 07, 2024	83.470	83.468	83.516	83.433
May 08, 2024	83.462	83.466	83.535	83.449
May 09, 2024	83.462	83.465	83.537	83.442
May 10, 2024	83.553	83.462	83.576	83.454
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

Data Source: RBI

It was after a long gap that the rupee strengthened close to the 83/$ mark. It was the flat dollar index and hopes of a rate cut in the US that kept the rupee stronger at ₹83.06/$. But, above all, it was also the higher than expected RBI dividend and hope of a reduced fiscal deficit that hardened the rupee. For the week, rupee touched a high of 83.018/$ and a low of 83.373/$.

BRENT CRUDE TAPERS TO $82.12/BBL

In the previous 2 weeks, the price of crude came down sharply from $90/bbl to $83.96/bbl. In the latest week to May 24, 2024, Brent crude fell further to $82.12/bbl after the US inventories once again turned positive.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Apr 29, 2024	88.40	89.22	89.29	88.11
Apr 30, 2024	87.86	88.41	88.79	87.46
May 01, 2024	83.44	85.80	85.89	83.29
May 02, 2024	83.67	83.59	84.44	83.05
May 03, 2024	82.83	83.94	84.39	82.81
May 06, 2024	83.60	83.24	83.83	82.78
May 07, 2024	82.99	83.74	83.82	82.42
May 08, 2024	83.58	83.02	83.82	81.71
May 09, 2024	83.88	83.79	84.33	83.45
May 10, 2024	82.79	84.21	84.53	82.70
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

Data Source: Bloomberg

Oil prices fell sharply in the week to $82.12/bbl after the US inventories bounced into the positive against expectations that there would be drawdown of inventory. It is a clear indication that the US inventories were being supported by record oil output in recent months. For the week, Brent crude touched a high of $84.49/bbl and a low of $81.57/bbl.

SPOT GOLD TAPERS TO $2,334/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)
Apr 29, 2024	2,334.44	2,337.50	2,346.85	2,320.08
Apr 30, 2024	2,284.57	2,335.10	2,336.54	2,284.94
May 01, 2024	2,317.88	2,285.91	2,328.40	2,281.66
May 02, 2024	2,303.29	2,319.89	2,326.57	2,285.58
May 03, 2024	2,301.89	2,304.27	2,320.52	2,277.60
May 06, 2024	2,326.15	2,293.98	2,331.98	2,291.91
May 07, 2024	2,315.20	2,326.31	2,329.98	2,310.10
May 08, 2024	2,309.05	2,315.40	2,321.43	2,303.74
May 09, 2024	2,345.88	2,309.04	2,347.59	2,306.67
May 10, 2024	2,360.14	2,346.26	2,378.45	2,345.25
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

Data Source: Bloomberg

The price of gold had bounced by 5% in the previous 2 weeks from $2,301/oz to $2,415/oz. The latest week saw gold taper to $2,334/oz, although the undertone still looks positive. During the current week, gold touched a high of $2,427/oz and a low of $2,325/oz. Gold closed the week very near to its lows.