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

18 Sep 2023 , 08:30 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.