Weekly Musings – Macro Quartet for the week ending October 06, 2023

9 Oct 2023 , 07:04 AM

HAWLISH RBI PUSHES BOND YIELDS UP; RUPEE WEAKENS

The big event of the latest week was the announcement of the RBI monetary policy. While the RBI maintained status quo on rates, the undertone was unmistakably hawkish. The RBI hinted that it would pause on rates for a longer period of time and also ruled out any rate cuts in the near future. The other big news was the global fall in the price of Brent crude, amidst demand concerns and a rising dollar. However, that did not really prevent the rupee from weakening during the week. 

The two key global triggers for Indian markets, US 10 year bond yields and US dollar index (DXY) continued their uptrend. US Bond yields stayed above 4.8% while the dollar index hovered between 106 and 107. These are historically relevant numbers. Bond yields in the US are at their highest level in 17 years while the dollar index had recently crossed $107/bbl for only the third time in the 40 year history of the dollar index (DXY). 

BOND YIELDS SPIKE TO 7.34 FOR THE WEEK

After being rangebound for a number of weeks, the India 10 year bond yields showed the first signs of hardening. This week, the 10 year bond yields in India hardened to a 7-month high of 4.34% at close. That was inevitable with the US bond yields spiking to 4.81% amidst the Fed still maintaining a hawkish stance. 

In addition, the US dollar index has also spiked leading to risks of imported inflation for India. Like in the US, some of the spike in bond yields was also du to bond selling as investors across the world are calling an end to the bond bull regime of the last 30 years.  Here is the story of India 10 year bond yields for the 4 recent rolling weeks.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 11, 2023	7.209	7.188	7.214	7.183
Sep 12, 2023	7.203	7.222	7.222	7.194
Sep 13, 2023	7.172	7.190	7.190	7.171
Sep 14, 2023	7.101	7.157	7.157	7.096
Sep 15, 2023	7.158	7.117	7.166	7.105
Sep 18, 2023	7.149	7.193	7.193	7.139
Sep 19, 2023	7.149	7.193	7.193	7.139
Sep 20, 2023	7.153	7.171	7.171	7.143
Sep 21, 2023	7.136	7.207	7.207	7.129
Sep 22, 2023	7.150	7.110	7.164	7.086
Sep 25, 2023	7.150	7.186	7.186	7.124
Sep 26, 2023	7.146	7.178	7.180	7.144
Sep 27, 2023	7.173	7.173	7.173	7.173
Sep 28, 2023	7.238	7.214	7.241	7.148
Sep 29, 2023	7.210	7.241	7.241	7.188
Oct 02, 2023	7.210	7.241	7.241	7.188
Oct 03, 2023	7.235	7.239	7.240	7.210
Oct 04, 2023	7.238	7.257	7.261	7.236
Oct 05, 2023	7.214	7.214	7.226	7.205
Oct 06, 2023	7.339	7.221	7.365	7.218

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.34%. However, this week the bond yields came out of the narrow range to spike by near 13 basis points to 7.34%. The closing was near to the high price of the week. What triggered the spike in bond yields. Like the last week ,the current week also saw pressure from rising US bond yields and the spike in dollar index. The latter has the potential to cause imported inflation. However, the real driver for the bond yields was the RBI policy. 

On paper, the RBI did not hike the repo rates, but that is part of a larger strategy by the RBI to implement hawkishness without bothering the rates. What the RBI is now expected to do is to hold rates at elevated levels for a longer period and also because the RBI has clearly indicated that rate cuts are ruled out for now. Within the MPC the RBI members are inclined towards a more hawkish approach, so this modified approach to hawkishness should hopefully work better. The good news is that consumer inflation fell from 7.44% in July to 6.83% in August and is expected to further taper to 5.45% in the month of September.

RUPEE HOLDS ABOVE 83/$ FOR SECOND WEEK IN A ROW

For the second week in a row, the rupee stayed above the 83/$ mark. In fact, through most of the current week, the USDINR stayed above 83.20. There was no ambivalence on the currency front this week with the rupee holding beyond 83/$ for the second week in a row. It touched a high of 83.35/$ during the week, before RBI intervention brought it back to around the 83.20/$ levels. 

However, the pressure points cannot be missed. The US bond yields are at 4.81%, US Fed has committed to hold rates above 5% till end of 2024 and the dollar index has crossed 107 during the week. All these factors put pressure on the rupee. With falling reserves, the RBI would be wary of intervening too much. Here is the rupee story for the last 4 weeks, with the latest week data shaded.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Sep 11, 2023	82.900	82.955	83.068	82.815
Sep 12, 2023	82.850	82.905	83.015	82.853
Sep 13, 2023	82.934	82.873	83.039	82.855
Sep 14, 2023	83.010	82.915	83.101	82.913
Sep 15, 2023	83.069	83.063	83.202	82.981
Sep 18, 2023	83.270	83.106	83.360	83.085
Sep 19, 2023	83.310	83.250	83.344	83.170
Sep 20, 2023	82.920	83.261	83.297	82.924
Sep 21, 2023	83.102	83.193	83.222	83.005
Sep 22, 2023	82.970	82.876	82.993	82.769
Sep 25, 2023	83.130	83.057	83.179	83.029
Sep 26, 2023	83.230	83.122	83.309	83.099
Sep 27, 2023	83.181	83.297	83.312	83.153
Sep 28, 2023	83.150	83.237	83.273	83.111
Sep 29, 2023	83.030	83.209	83.209	83.012
Oct 02, 2023	83.174	83.165	83.234	83.123
Oct 03, 2023	83.214	83.233	83.271	83.127
Oct 04, 2023	83.250	83.235	83.346	83.173
Oct 05, 2023	83.200	83.214	83.305	83.178
Oct 06, 2023	83.118	83.218	83.303	83.121

Data Source: RBI

At the current juncture, there are two factors at play on the Indian rupee. The current account deficit (CAD) came in at $9.2 billion for Q1FY24 or just about 1.1% of GDP. Normally, that would have been positive for the rupee, but the CAD story was clouded by the latest report by UBS. The Swiss brokerage firm has underlined the possibility of the CAD going above 1.7% this year on the back of higher crude prices and the inability of countries to influence other nations beyond a point. 

The other factor is Brent crude prices, which has fallen sharply in the recent week from $94/barrel to $84/bbl. More importantly, the actual fall in crude prices has been from a high of $97/bbl in the last 3 weeks. India has an 85% exposure to crude oil imports, which is a major overhang for the markets. RBI intervention is never a great long term solution amidst limited forex reserves and the possibility that too much rupee liquidity can still create artificial demand.

BRENT CRUDE CARACKS SHAPRLY TO $84/BBL

After a frenetic 35% spike in crude oil prices in the last 3 months, the oil rally appears to be not just slowing down; but also tapering. The move in crude oil prices from $70/bbl to $94/bbl was almost relentless. Two factors led to a fall in the crude prices in the week. Firstly, OPEC did not announce further supply cuts and helping oil prices to fall sharply. 

There are also demand concerns that may crop up, especially if you look at the increasingly inward looking policy of China. The crude prices also got impacted by the sharp spike in the US dollar index, which has rallied to above 107. Clearly, the strong dollar is also having a salutary impact on the oil price risk for India. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Sep 11, 2023	90.64	90.83	91.45	90.11
Sep 12, 2023	92.06	90.62	92.40	90.52
Sep 13, 2023	91.88	92.04	92.84	91.63
Sep 14, 2023	93.70	92.04	94.21	92.02
Sep 15, 2023	93.93	94.02	94.63	92.67
Sep 18, 2023	94.43	94.28	94.95	93.79
Sep 19, 2023	94.34	94.66	95.96	94.16
Sep 20, 2023	93.53	94.49	94.72	92.76
Sep 21, 2023	93.30	93.08	94.60	92.20
Sep 22, 2023	93.27	93.37	94.64	92.80
Sep 25, 2023	91.88	92.39	92.73	91.20
Sep 26, 2023	92.43	91.87	92.70	90.41
Sep 27, 2023	94.36	92.43	94.80	92.43
Sep 28, 2023	93.10	94.38	95.35	92.75
Sep 29, 2023	92.20	93.07	94.13	91.96
Oct 02, 2023	90.71	92.18	93.33	90.35
Oct 03, 2023	90.92	90.40	91.56	89.50
Oct 04, 2023	85.81	91.04	91.21	85.75
Oct 05, 2023	84.07	85.88	86.52	83.84
Oct 06, 2023	84.58	84.49	84.95	83.44

Data Source: Bloomberg

Crude has the tendency to overrun on both sides. That is what happened in the last few weeks when crude rallied to $96/bbl. Falling US crude inventories is also adding to the pressure on global oil prices. One must not forget that Saudi Arabia and Russia control 23% of world oil output and about 27% of annual oil exports. 

However, the real driver for weak oil prices was the sustained strength of the US dollar.  The US, China, and India account for 42% of world oil consumption and there appears to be no let-up in demand. Most likely we could see crude oil bouncing back in the coming months to recent highs.

GOLD PRICES FALL SHARPLY DURING 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)
Sep 11, 2023	1,921.66	1,919.16	1,930.90	1,916.90
Sep 12, 2023	1,913.26	1,922.90	1,925.05	1,907.15
Sep 13, 2023	1,906.30	1,913.55	1,916.30	1,905.50
Sep 14, 2023	1,910.32	1,906.68	1,912.99	1,900.95
Sep 15, 2023	1,923.57	1,910.90	1,930.84	1,909.74
Sep 18, 2023	1,933.14	1,924.19	1,934.61	1,922.15
Sep 19, 2023	1,930.94	1,933.68	1,937.94	1,929.71
Sep 20, 2023	1,929.68	1,931.69	1,947.80	1,927.90
Sep 21, 2023	1,919.57	1,930.99	1,931.74	1,913.40
Sep 22, 2023	1,924.99	1,920.08	1,929.65	1,919.58
Sep 25, 2023	1,915.66	1,925.24	1,927.26	1,915.00
Sep 26, 2023	1,900.49	1,916.03	1,916.89	1,899.17
Sep 27, 2023	1,874.70	1,900.69	1,903.95	1,872.47
Sep 28, 2023	1,864.56	1,875.73	1,880.15	1,857.76
Sep 29, 2023	1,848.31	1,865.43	1,880.24	1,846.34
Oct 02, 2023	1,827.40	1,848.13	1,849.06	1,826.60
Oct 03, 2023	1,822.81	1,827.96	1,833.36	1,814.70
Oct 04, 2023	1,821.08	1,824.30	1,831.05	1,816.15
Oct 05, 2023	1,820.01	1,820.49	1,829.30	1,812.70
Oct 06, 2023	1,832.26	1,820.40	1,834.97	1,810.10

Data Source: Bloomberg

In the latest week, the price of gold not only fell sharply below $1,900/oz, but also decisively fell below $1,850/oz, the lowest level since late February 2023. Risk assets are coming back and that is not great news for the gold segment, which is normally the antithesis of gold demand. Gold, being a safe haven asset, has been the loser on this count. Again, since gold is expressed in dollars, the spike in the dollar index is also hurting gold prices. Gold is likely to stay under pressure for now.

How do we see the macro quartet next week? There are big data announcements next week. The US Fed minutes will be put out and the US CPI inflation will also be published. India will announce key data points like consumer inflation, IIP growth, WPI inflation and trade deficit data. For now, the story seems to be of hardening US bond yields and dollar strength. That is likely to see any meaningful shift in the coming week.