MONTHLY SYNOPISIS: AUG 2019

Currency Map:

WT1 Crude: USD 55.15 vs 58.58 in June, Brent Crude at 59.10

Nifty: 11023, dn 0.69% m/m.

Rupee traded in the 69.01-72.25 range in Aug and closed weaker at 71.40 as against July close of 68.76. EURINR climbed 3.34% and Pound rallied 3.79% against Rupee.

Indian 10 Year G-SEC yield climbed to 6.56% . USDINR fwd premia softened to 4.20%.

FII’S nett sold  Rs 16126 Cr ofIndian Equities in Aug . FII’S have nett bought Rs 49373 Cr of Indian Equities in this calendar Year till date. FII’S have pulled out Rs 29000 Cr of Indian Equities since budget day. FII’S nett bought Rs 10821 Cr of Indian debt securities in Aug .FII’S have nett bought Rs 29603 Cr of Indian debt in this calendar year till date.

Indian economic slow down, Govt’s economic measures, banking merger announcements, RBI rate cut, US-China trade war escalation and Brexit uncertainity dominated August developments.

Rupee ended lower, benchmark indices had roller coaster ride , Crude declined, Gold climbed and Global treasury yields declined.

Indian Q1 GDP growth declined to 5%, lowest in 6 Years. This is against 5.8% in Q4 2018-19 and 8% in Q1 of last fiscal. Mfrg growth declined to 0.6% and agri sector grew by 2% as against 5.1% in Q1 of last year. Household spending climbed only 3.1% , down from 10.6% in March quarter. Investments grew by 4% from 3.6% in March quarter.

Govt announced merger of 10 banks into 4 entities and steps towards better Governance. This will enable banks to absorb shocks, reap scale size and raise capital. Banks will also have separate mechanism for sanctioning and monitoring of big loans. Bank boards will also be empowered.

Earlier in the month, Govt announced various measures to increase liquidity and boost consumption demand.

Auto sector measures include additional 15% depreciation on vechiles, lifting of ban on Govt purchase of new vehicles, clarification on BS 1V vechiles, deferment of higher registration charges till June 2020 and a proposed scrappage policy. Banking measures included upfront infusion of Rs 70,000 Cr capital (which could increase lending up to 4 lac Cr by PSU’S), linking of borrowing rates to repo rate for effective rate transmission, freeing honest credit decision burden of bank officials from vigilance, and co origination of credit decision with NBFC clients. To free IT demands from arbitrariness, FM has announced centralised coding system and time bound settlement of IT demands. To eae MSME burden, Govt has announced that all pending payments will be cleared within 30 days and all payments in future will be cleared within 60 days.                                   

For Capital markets, FM announced scrapping of surcharge on capital gains, whicih would benefit both FPI and domestic investors. This is likely to encourage Equity inflows back, as FII’S have pulled out Rs 22000 Cr since July budget.

To boost development, FM announced that Rs 100 lac Cr infrastructure development will be streamlined and monitored.

Govt announced relaxation in FDI norms. 100% FDI in insurance intermediaries, easing of local sourcing norms in single brand retail (exports to be counted as local sourcing) , 26% in digital media, 100% in coal mining and contract manufacturing have been allowed. Sugar subsidy for exports totalling Rs 6270 cr was approved. This is around Rs 10.5/kg.

RBI is to transfer 1.7 lac Cr to GOI. Dividend of around 1.23 lac Cr and excess reserves of around Rs 52000 Cr is to be transferred to GOI. This is in line with Jalan committee recommendations. GOI will be relieved to receive this amount as it can maintain its fiscal discipline. GOI is also likely to accelerate stake sales in PSU’S.

RBI cut repo rates by 35 bps in first week of Aug and urged banks to move to repo based lending for faster and effective transmission of interest rates. RBI minutes showed that the MPC was concerned about economic slowdown and supported aggressive rate cuts. The committee also noted slow down in service sector.

Global event was dominated by US-China trade war escalation.Consequences were felt in Global Equity markets and EM currency movement. Chinese Yuan declined steeply to 7.17, triggering free fall in other EM Currencies and Rupee.

China announced retaliation tariffs on USD 75B US imports. Additional tariffs of 5% or 10% will be imposed on a total of 5078 products lines originating from US. Goods include agricultural products, crude oil, small aircraft and cars.The first batch will take effect on September 1. Others will take effect on December 15.

US President retaliated by imposing further tariff on Chinese imports. Starting on October 1, tariffs on USD 250B in China imports will be raised from current 25% to 30%. The rate of the planned tariffs, to take effect on September 1, on USD 300B of Chinese products, will be raised from 10% to 15%. US President also asked US Companies to start looking for alternatives to China and bring home their manufacturing base or shift elsewhere.

There was some respite, as US President toned down his rhetoric and said that trade talks with China will continue.

Fed minutes of last meeting showed that policymakers highlighted concerns about slowing global growth and trade tensions as headwinds, but stopped short of suggesting that a series of rate cuts should follow, according to the minutes of the Federal Reserve’s July meeting released Wednesday.

The Fed suggested that the best course of action would be to remain “flexible” and monitor incoming economic data amid uncertainty over when risks weighing on the economy, including the U.S.-China trade war would be resolved.

Despite headwinds, US Consumer spending remained solid and consumer confidence climbed higher. US housing, manufacturing sector and business spending softened. US GDP for Q2 was at 2%. The Fed’s preferred measure of inflation, the PCE deflator, remained unchanged at 1.6% in July, which gives the Fed the green light for further easing. 

ECB policy meeting showed that members “broadly supported the reintroduction of an easing bias” to the forward guidance. That came in light of “weakness of the economic outlook and the muted inflation developments”.

Global manufacturing PMIs have remained weak, and geopolitical risks, such as the no-deal Brexit, have intensified. Consumer sentiment levels in Europe are also low, consistent with levels that have historically preceded a recession.Global growth is expected to be only at 2.9% in this fiscal.

Crude Oil declined and Gold climbed higher.

Currency outlook:  US-China trade issue is likely to be the major factor that could impact USDINR movement.Decline in Yuan and EM currencies could weigh on Rupee. If trade tensions ease off, Rupee could gain to 70.50. EURO is likely to remain weak against USD. Pound could experience a roller coaster ride, depending on Brexit developments.

USDINR has major resistance at 72.25. Rupee could gain to 70.85/70.50. However, Rupee has not breached 68.30 on the downside for the last 1 year. Expect 70.50-72.25 range for next few weeks. USD imports could be hedged at 70.85/70.50 and exports can be hedged closer to 71.80.

EURINR exports can also be fwd hedged at 79.25+ levels. EURINR may have hit a near term top at 80. Expect possible decline to 78 levels.

GBPINR recovered to 88+ levels, backed by Rupee weakness and partial recovery of GBPUSD pair. Expect 85-88 range in coming weeks.

JPYINR could consolidate in the 66-68.50 range.

Outlook for July:

Suggestion: USD exports be hedgedon rally to 71.80, EURINR exportsbe hedged on rally to 79.25+levels. GBPINR exports be hedged due to BREXIT uncertainty.