MONTHLY/2019 Yearly SYNOPISIS: DEC 2019

Currency Map:

WT1 Crude: USD 61 vs 45.40 in Dec 2018, Brent Crude at 69.30 vs 53.65 in Dec 2018.

Nifty: 12168, up 12% y/y. Gold closed the year at USD 1517 vs USD 1282 in Dec 2018, up 18% y/y.

Indian 10 Year G-SEC yield closed at 6.50% . USDINR fwd premia inched higher to 4.25% after softening to 3.65% during the course of the calendar year.

Rupee traded in the 68.30-72.40 range in 2019 calendar year and closed weaker at 71.38 as against Dec 2018 close of 69.77. EURINR closed flat at 80.08, while GBP climbed 6.09%. Yen climbed 3.2 y/y against Rupee.

Indian FX reserves ballooned to USD 457 bn in Dec 2019, thanks to robust FII and FDI inflows. RBI’S relentless buying of USD at spot of 70.55 also contributed to reserves expansion.

FII’S nett bought  Rs 88172 Cr of Indian Equities in 2019 . FII’S  nett bought Rs 25559 Cr of Indian debt in this calendar year till date. Indian FDI inflows stood at USD 23.35 bn in the present fiscal till Oct 2019.

While Indian Equity indices climbed 12% y/y, macro ecomonic growth data was very weak. Indian Q1 GDP grew by 5% and Q2 GDP slumped to 4.5%. While positive indications are emerging in the last few months, Q3 GDP may stillbe around 4.5%. RBI has downgraded GDP growth to 5.1% for this fiscal. Bank balance sheet clean up, tightening of credit norms, crisis in NBFC’S, transition from BS 1V to BS V1 in auto industry, Global economic slow down were all contributors to sluggish gowth. Telecom majors were hit by SC ruling on AQR.

Govt also responded to the crisis situation by 1) Increasing depreciation for auto purchases, 2) Incentivisng EV production and purchase, 3) Bank recapitalisation, 4) Bank mergers 5) Corporate tax cut, 6) Credit guarantee to banks puchasing NBFC loans, 7) Refund of pending GST claims, 8) AIF Corpus fund for realty sector, 9) Rollback of IT surcharge on super income of FII’S, 10) Roadmap for Rs 103 lac Cr in infrastructure investement in the next 5 years 11) Strategic sale of some PSU’S.

On the monetary policy front, RBI cut rates by 135 bps last year and nudged banks to link borrowing rates to REPO rate for faster tranmission of rate cuts.

With budget due on Feb 1 st, there is growing expectation that Individual rate tax cuts and rationalisation may be on the offing.

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 IIP continued dipping into negative zone and Core sector growth in APR-NOV period was flat. Inflation which remained subdued till Aug, has shot up to 5.5% in Nov, forcing RBI to pause rate cuts. Higher food prices, due to unseasonal rains has led to spurt in vegetable and pulses prices. Food prices climbed 10% in Nov.

On external front, Indian CAD shrunk to 0.9% of GDP in July-Sept period, due to lower trade deficit. CAD was at 2% of GDP in Q1.Total exports from India (Merchandise and Services) registered a growth of 1.60 per cent year-on-year during April-November 2019 to US$ 353.96 billion, while total imports estimated to be US$ 408.02 billion, exhibiting a negative growth of 5.30 per cent.Thus, the overall trade deficit for April-November 2019 is estimated at US$ 54.06 billion.

While CAD shrunk, fiscal deficit is likely to breach Govt target and expand to 3.6%- 3.8%. This is a major worry for Rupee. Expanding fiscal deficit could weaken Rupee.

GST collections picked pace in Dec again after declining in Sept-Nov period. Indian auto sales slumped 18% y/y in 2019 calendar year. With transition from BS 1V to BS VI and pent up demand coming back, PV sales is likely to expand in 2020.

Global event was dominated by 1) US-China trade war, 2) Brexit issues, 3) Fed monetary policy, 4) Cut in Oil production.

These above issues will remain dominant in 2020 also. Global markets heaved a sigh of relief as US President said that a significant phase1 deal with China is done covering Intellectual property rights, financial services and import of agri products. Despite this, the trade war has already cost USD 700 bn of Global economic output and could trim 0.8% of Global GDP.

USD ended 2.6% higher against Euro in 2019. USD gains were stemmed by Fed’s rate cuts. While lower US interest rates has diminshed the appeal for USD, it is still a higher rate currency than Euro and Pound. With US economy climbing at normal trend and robust job additions, USD should remain a favorite in fundmental terms. USD’S weakness could be only triggered by further US rate cuts.

US-China trade war also impacted EU growth adversely. Exports and Investment were badly impacted. ECB was forced to launch QE yet again. With ECB hitting the limits of monetray policy options, it remains to be seen as to how EU limps back to normal growth.

Pound rallied in Nov and Dec as UK voted to elect a new Govt with enough majority to get Brexit deal cleared. However, trade issues needs to be sorted out and may create new hurdles in smooth exit.

China experienced a sharp slowdown in 2019, as the Trump tariffs and the associated uncertainty damaged the industrial sector and exports. Risk is on the down side despite a temporary truce in trade war. US President could hit back hard again, if there are signs that China is not fulfilling the agreement.

This Year is also an election year in US. There is an even chance that Mr Trump may get relected. Hence, the focus will remain on trade issues. If uncertainity deepens, Fed may cut rates by 25 bps again.                                                                                 

Globally, Central banks maintained soft stance and effected rate cuts. Fed reversed its tightening policy and cut rates by 75 bps and has signalled status quo till 2020.

Brent Crude prices rallied from USD 54 to USD 69 in Dec 2019. US sanctions on Iran, attack on Saudi Aramco facility and other Geo political tensions contributed to occasional spikes. However, the rally is due to deep productions cuts by OPEC, notwithstanding their diminished role (as they supply 40% only) over the last decade. IEA expects global demand to rise by 1MN barrells a day and Brent crude is expected to average USD 60/bbl in 2020.

In a paradoxical parallel move, Gold prices climbed in tandem with Equity markets. Gold climbed 18% in USD terms and apprx 20% in Rupee terms.

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.

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 68.50-73 range for USDINR pair in 2020. USD imports could be hedged at 70.55 and on further decline to 69 levels and exports can be hedged on rally to 72/72.25.

EUR/USD is expected to trade in the 1.09-1.15 range this year.EURINR exports can also be fwd hedged at 80.50+ levels. GBPINR exports can be fwd hedged in the 94-95 zone.

JPYINR could consolidate in the 63.50-66.50 range.

Outlook for January 2020:

Suggestion: USD exports be hedgedon rally to 72/72.25 levels. EURINR exportsbe hedged on rally to 80.50+levels. GBPINR exports be hedged at 93.50+.