MONTHLY SYNOPISIS: NOV 2019

Currency Map:

WT1 Crude: USD 55.40 vs 54.18 in Sep, Brent Crude at 60.75.

Nifty: 12056, up 1.5% m/m.

Rupee traded in the 70.55-72.25 range in Nov and closed weaker at 71.74 as against Oct close of 70.81. EURINR declined 0.51% and GBP climbed 0.66%. Yen closed flat m/m against Rupee. RBI’s relentless buying of USD has stemmed Rupee gain in the last few months. RBI’S FX reserves climbed USD 18 bn in Oct alone. With CNY gaining and FPI flows robust, Rupee should have gained to sub 70 levels.

Indian 10 Year G-SEC yield closed at 6.47% . USDINR fwd premia declined to 3.85%.

FII’S nett bought  Rs 23240 Cr of Indian Equities in Nov . FII’S have nett bought Rs 83490 Cr of Indian Equities in this calendar Year till date. FII’S have nett sold Rs 3414 Cr of Indian debt securities in Nov. FII’S have nett bought Rs 39744 Cr of Indian debt in this calendar year till date.

Indian Equities climbed and Crude price remained stable.

On the macro economic front, data did not bring any cheer.

Indian Q2 GDP fell to 4.5% VS 5% in Q1, lowest in over 6 years. Mfrg declined 1%, agri grew by 2.1%. Gross capital formation was just 1% vs 11.8% in Q2 2018-19, implying anemic investment. Govt expenditure was higher by 15.6% vs 10.9% in Q2 2018-19, Private consumption grew only by 5.1% vs 9.8% in Q2 2018-19.

Govt has recently announced various measures including cut in corporate tax, AIF for real estate to help stuck projects, merger of banks and strategic sales in 5 PSU’S.

Economists feel that heavy Govt heavy spending is vital for economy to climb back. RBI rate cut has not translated into corresponding increase in Private spending, implying partial failure of rate transmission. Govt could cut personal taxes to spur consumption.

Indian IIP declined -4.3% in Sept, steepest decline since 2011. IIP has climbed 1.3% in Apr-Sept 2019 as against 5.2% in the same period last year. Mfrg sector declined -3.9%, mining declined -8.5%, consumer durables shrunk -9.9% and Capital Goods sector declined -20.7%.

Indian CPI breached RBI’S comfort zone of 4% and climbed to 4.62%, due to higher food inflation. Food inflation climbed to 7.89% vs 5.1% in Sept. Core inflation moderated to 3.5% from 4%. Vegetable prices climbed 26% m/m.

Indian exports declined 1.1% to USD 26.4 bn in Oct. Imports contracted 16.3% to USD 37.4 bn. Trade deficit is at USD 11 bn. Oil imports declined 31.7% in Oct to USD 9.6 bn. Exports in Apr-Oct is at USD 186 bn (down 2.2%) and Imports has declined 8.4% in Apr-Oct to USD 280.7 bn.

Moody lowered Indian rating outlook to negative from stable,citing possibility of fiscal slippage and rising debt levels due to prolonged lower growth. Rating agency added that Govt policy measures would be limited to support business investment and significantly broaden the tax base. Foreign Currency rating was maintained at existing grade.

Indian Cabinet approved strategic disinvestment in 2 PSU’S (BPCL and SCI) and stake sales in three more PSU’S. Cabinet also approved moratorium on Spectrum fees payment by Telcos for two years, but decision preserves NPV.

Global event was dominated by US-China trade issues and monetary policy actions by central banks.

US President said that a significant phase 1 deal with China is most likely covering Intellectual property rights, financial services and import of agri products. Focus is in upcoming meet between US and Chinese Presidents. If trade deal is signed, Global markets may heave a sign of relief.

As per Fed minutes, Fed policymakers felt that present rate of 1.5-1.75% is supportive and hinted at pause in coming weeks. Fed minutes noted that growth is modest, inflation is under target and employment is robust.

US Q3 GDP was revised to 2.1%, with consumer spending moderating to 2% as compared to 2.7% in first half of the Year. Inflation is modest and hence Fed may pause on rate cuts in coming months.

Eurozone GDP grew 0.2% qoq in Q3, unchanged from Q2, matched expectations. Over the year, GDP grew 1.2% yoy. Employment grew 0.1% qoq, below expectation of 0.2% qoq. German GDP grew 0.1% qoq in Q3, beat expectation of -0.1% qoq.

OECD warned that trade conflict, weak business investment and persistent political uncertainty are weighing on the world economy and raising the risk of long-term stagnation. Global GDP growth for 2020 was revised down by 0.1% to 2.9%, same as this year, lowest annual rate since the financial crisis.

Chinese central bank will step up credit support to the economy. Chinese Central bank Governor said during a meeting with commercial banks that capital replenishment will be promoted to increase bank’s lending ability. Additionally, countercyclical adjustments will be stepped up to ensure growth in money supply and social financing.

BOE left rates unchanged at 0.75%, but two members voted for rate cut. BOE revised lower its GDP growth forecast to +1.2% y/y for 2020, compared with +1.3% projected in August. Inflation forecasts are downgraded across the board. Based on market interest rate, inflation in one year’s time is revised lower to 1.51%, from +1.9% in August.

Currency outlook:  US-China trade issue is likely to be the major factor that could impact USDINR movement, due to strong correlation with USD/CNY movement.Yuan and EM currencies movement could weigh on Rupee. RBI’S intervention has to be factored for Rupee’s upward direction. Expect 71-72 range for next few weeks. USD imports could be hedged at 71/70.60 and exports can be hedged on rally to 72/72.25.

EURINR exports can also be fwd hedged at 79+ levels. GBPINR exports can be fwd hedged in the 92-93 zone. GBP imports can be hedged closer to 89 levels.

JPYINR could consolidate in the 65.50-68.50 range.

Outlook for July:

Suggestion: USD exports be hedged on rally to 72/72.25 levels. EURINR exports be hedged on rally to 79.20-79.50+ levels. GBPINR exports be hedged at 93.50+.