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Weekly Musings – Macro Quartet for the week ending September 15, 2023

18 Sep 2023 , 08:32 AM

Despite the macro churn of data flows, not much is happening either on bond yields or on gold prices. Most of the action seems to be predicated on the crude oil prices and the rupee dollar equation, which is where most of the macro pressure is visible in the latest week to September 15, 2023. Bond yields were flat to weak while gold prices dipped briefly and bounced back to where they started. However, there was visible pressure on crude oil prices and the Indian rupee. During the week, Brent Crude rallied to above $94/bbl on fears that the supply crunch could only get worse. The latest OPEC report has also projected robust oil demand and that has been underlined by the US not even being close to a recession. With the likes of ECB calling a top on rates, there is every possibility that demand may get a boost. Not to forget that China is already going against the hawkish tide and cutting rates while central banks globally are still hiking rates. Higher crude prices (now up nearly 35% in 3 months) hints at a widening trade deficit and current account deficit for India. Weaker rupee makes imports more expensive, paving the way for imported inflation. 

YIELDS AND GOLD STILL MOVE IN A NARROW RANGE

Even as the action was largely focused on the 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 remained in the range of 7.1% to 7.2%. There were expectations that the bond yields in India may spike with the rise in US bond yields, but that has not been the case. The Indian bond markets are still ambivalent on how the RBI would react to higher inflation and that has left the bond yield more in an ambivalent state. For the bond yields, the inflation continues to be an overhang, but it was liquidity management that came to the rescue in the week, especially after the RBI announced the phased withdrawal of the I-CRR last week. Gold prices had held above the $1,900 levels in recent weeks, but it has faced pressure as the dollar strengthened. Also, higher inflations imply higher interest rates and that raises the opportunity cost of holding gold; making it less attractive. Now for the quartet.

BOND YIELDS STAY FLAT AT 7.16% IN THE WEEK TO SEPTEMBER 15, 2023

The bond yields remained flat to marginally lower during the week. The 10-year benchmark bond yields oscillated between 7.101% to 7.209% with the yields largely gravitating towards the middle of the range towards close. This trend of flat yields has continued for the third week in succession. The logical assumption would be that higher inflation would lead to higher bond yields. However, that has not been the case due to uncertainty of RBI action. 

Date Price (%) Open (%) High (%) Low (%)
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

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

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.158%. However, it opened the latest week at 7.209% and stayed around the 7.10%-7.21% range through the week. Higher bond yields in the US, the rising dollar index or even the hawkishness of the Fed has not had much of an impact on the bond yields on the 10 year benchmark. However, that is more due to uncertainty over how the RBI would react to the higher inflation reading. Inflation remains an overhang, but the broad 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 the line of argument that the RBI has also given and for now the market appears to be buying that argument. Apart from that, even the infusion of liquidity by the RBI through the phased withdrawal of I-CRR is likely to ensure that rates at the short end of the yield curve stay in check. This is likely to spill over to longer yields also.

RUPEE ENDS WEEK TO SEPTEMBER 15, 2023 ABOVE 83/$

The last two weeks of August and the previous week to September 08, 2023 had seen the rupee consistently above 83/$. However, the RBI intervention helped the rupee to recover to below 83/$. It is not clear to what extent the RBI will support the rupee, but the latest week has again seen reserves dwindling by $5 billion. In the current week to September 15, 2023, there was substantial RBI intervention, which resulted in the rupee staying below the 83/$ mark for a better part. However, the pressure built up in the last two days pushing the rupee to close the week above the 83/$ levels once again. RBI is still selling spot dollars. 

Date 

Price (₹/$)

Open (₹/$)

High (₹/$)

Low (₹/$)

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

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

Data Source: RBI

The pressure on the rupee is on two fronts. Firstly, the higher Brent Crude prices are putting pressure on the rupee through imported inflation. The trade deficit in August has widened by 16% compared to July and that was the factor that weakened the rupee in the last 2 days of the week. There is also a global argument here. During the current week, the dollar index (DXY) gained to the 105.40 levels. This dollar strength, led to pressure on the Indian rupee despite the RBI intervention by selling spot dollars. 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, as the dollar strength shows no sighs of relenting. The big trigger could be the next FOMC meeting outcome on September 19, 2023, especially in the light of the sharply higher consumer inflation at 3.7% in August.

BRENT CRUDE RALLIES ABOVE $94/BBL ON SUPPLY CONCERNS

Brent Crude has now hardened by nearly 35% in the last 3 months and that is putting pressure on the India import basket. After all, India still needs to import 85% of its daily crude requirements. In the previous week, Russian oil minister, Alexander Novak, had clearly hinted at additional supply cuts in sync with the OPEC. Combined with robust demand levels, as outlined in the OPEC report, it looks like oil could be headed towards the $100/bbl. That is a level that forces the Indian government into tough policy choices. To add to this price pressure, the US crude inventories continue to remain under pressure, putting further strain on Brent Crude prices.

Date 

Price ($/bbl)

Open ($/bbl)

High ($/bbl)

Low ($/bbl)

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

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

Data Source: Bloomberg

It is still unclear, what is the story of oil on the demand side but several factors are hinting at improved demand. ECB has hinted at peaking of rates, so there could now be a greater focus on growth. China has cut rates to boost growth and that could have larger positive implications for oil demand. Above all, the much feared recession in the US looks elusive and that is also keeping oil demand robust. It now looks like the oil demand may support the supply concerns, pushing oil well above the $100/bbl mark.

GOLD PRICES TAPER REMAIN LACKLUSTRE

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 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

Sep 04, 2023

1,938.19

1,940.49

1,946.42

1,936.15

Sep 05, 2023

1,925.81

1,938.59

1,939.13

1,925.22

Sep 06, 2023

1,916.28

1,926.16

1,929.80

1,914.80

Sep 07, 2023

1,919.19

1,916.86

1,923.67

1,916.10

Sep 08, 2023

1,917.81

1,919.57

1,930.19

1,917.36

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

Data Source: Bloomberg

The gold price bounce in late August proved to be short-lived as dollar strength subdued gold prices. In the latest week, the price of spot gold tapered to $1,906/oz but bounced back to $1,924/oz, almost where it had started. Gold has been struggling in a range for a long time and it looks unlikely that it can effectively break out either ways, in the absence of strong reasons. For now, the strong dollar and expectations of higher interest rates have kept a cap on gold prices, while uncertainty is offering a floor support to gold.

How do we see the macro quartet next week? With the RBI opening liquidity taps, expect further tapering of yields. The big challenge for India at a policy level would still be the combination of weak rupee and elevated crude prices.

Related Tags

  • crude
  • crude oil
  • Crude oil prices
  • gold
  • gold prices
  • USD-INR
  • Yields
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