MONTHLY SYNOPISIS: DEC 2020

Currency Map:

WT1 Crude: USD 48.40vs 45.53 in NOV 2020, Brent Crude at 51.44 vs 48.28 in NOV 2020.

Nifty: 13967, UP 7.7% m/m. Gold closed at USD 1893.

Indian 10 Year G-SEC yield closed at 5.89% .

Rupee traded in the 73.03-74.96 range in DEC. The pair closed at 73.07, registering an impressive gain of 1.31% for Rupee.  EURINR closed at 89.76, up 1.67% m/m, while GBP climbed 0.85% m/m. Yen declined 0.18% against Rupee.

USDINR traded in the 70.93-76.91 range in this calendar year. The pair gained 2.36% (Rs 1.69). USDINR closed at 73.07 as against 71.38 in Dec 19. Indian Equity index Nifty gained 14.8% y/y as compared to Dec 2019.

This calendar year will be remembered as historical in all spheres. Equity index Nifty crashed 38% in Feb/March 2020 and then the bounce was equally sharp and dizzying. Rupee declined to 76.91 and then gained to 72.75. Rupee had more potential to gain, but it was stemmed by RBI intervention. Indian FX reserves has swelled to USD 581 BN as on Dec 18 th. Rupee gains tracked broad USD weakness against majors and EM Currencies.

India has shown resilience and weathered 3 major crisis 1) Corona impact on health and economy, 2) Border stand off with China, 3) Economic slow down. While the first quarter GDP shrank sharply, second quarter pulled back. With all major indicators flashing revival signs, 3^rd Quarter GDP is expected to reenter positive zone. The blessing in disguise was the impact on Current account. CAD has shown surplus and is at 2.6% of GDP in Q2. FII and FDI flows were unprecedented. FII flows into Equities since April has crossed 2 lac Cr. GST collections is above pre pandemic level. Auto sales is also back above pre pandemic levels. Rail freight and Power consumption have also registered sharp upswing.           

RBI and Govt aided the economic rebound with steep rate cuts and targeted stimulus measures. Loan Credit guarantee schemes, expansion of working capital and Production linked manufacturing incentives stand out amidst the many stimulus measures. RBI ensured that liquidity is eased for NBFC’S and announced various debt recast plans and loan moratorium.

The major concerns are on inflation and expanding fiscal deficit. RBI views inflation as supply side issue and hopes that it will cool down as logistic bottlenecks and labor problems are overcome. RBI is maintaining accommodative stance and may remain on pause mode till inflation cools to around 4%. Real interest rates have turned negative and hence there is limited scope for rate reduction. RBI did operation twist to keep long term yields low to facilitate lower benchmark rates.

As we step into 2021, there is a vaccine hope. Govt is expected to roll out mass vaccination early next week and this should bring confidence back. Increased mobility, travel and holidaying could start in second half and bring life back to tourism, retail and hospitality industry.

Fundamentally, negative interest rates in US could keep USD on the defensive and aid Rupee. However, US policy on China by new US President and relative economic performance by US via vis EU will decide the future path of USD movement against majors and Rupee.

Technically, USDINR has strong supports at 72.75/72.30/71.50. It has to clear 74.85 to resume long term strength for USD.

Rupee’s decline against EUR and GBP can be attributed to EUR and Pound strength against USD, shaped by US fiscal and monetary policies.

Last Month Macro economic data releases:Indian OCT IIP climbed 3.6% and manufacturing sector climbed 3.5%. IIP  declined 6.6% in Oct 2019. IIP has contracted 17.5% in this fiscal till Oct. Power sector climbed 11.2%, mining contracted 1.5%, capital goods climbed 3.3%, consumer durables grew 17.6% and non durables grew by 7.5%.           

CPI inflation declined to 6.93% in November 2020, compared with 7.61% in October 2020.Food inflation dipped to 8.76%.Core CPI inflation rose slightly to 5.51% in November 2020 compared with 5.46% in October 2020. The cumulative CPI inflation has moved up to 6.87% in April-November FY2021 compared with 3.73% in April-November FY2020.

Indian Nov exports declined 9% to USD 23.43 bn.Exports during April-November 2020-21 were USD 173.49 billion, as compared to USD 211.17 billion during the same period last year, exhibiting a negative growth of 17.84%. Imports declined 13.33% to USD 38.52 bn.Imports during April-November 2020-21 were USD 215.67 billion, as compared to USD 324.9 billion during the same period last year, exhibiting a negative growth of 33.56%.

Trade deficit for Nov stands at USD 9.96 bn.

FII investment data:

FII’S nett bought Rs 52883 Cr ofIndian Equities in Dec . FII’S nett bought Rs 4681 Cr of Indian debt securities in Dec . In this financial year, FII’S have nett bought Rs 211793 Cr of Equities and have sold Rs  21789 Cr in debt. In FY 19-20, FII’s sold Rs 10200 Cr of Equities and 47393 cr of debt.

The most important event is budget 2021. FM has said that it will be a budget not seen before. There is great hope after this statement.

USDINR performance in 2021 will be linked to flows and USD movement against majors.

Global developments:USD declined against majors. EUR/USD climbed to 1.23. Pound is also strong, and hit 1.3650.

The biggest lesson of 2020 is: Even the worst case of a pandemic fall out (on human lives and deep negative economic impact) can be neutralised by zero lending rates and ultra loose monetary policy. Fed, ECB and various central banks along with their Govts acted with great speed to announce monetary and fiscal measures to turn around economies within a short span of 3 months.

There were lot of positives last month. US Congress approved USD 900 bn package. It was signed by US President and is expected to provide relief to consumers. UK-EU finally agreed on trade deal and paved the way for UK’S exit from EU. US and UK vaccination has begun, providing relief and hope to millions.

Fed assured that rates will be low till 2023. ECB expanded Pandemic relief fund. 

USD’’s weakness could be attributed to 1) Risk on mode and hence USD is shunned as safe haven, 2) Vaccine roll out has increased risk appetite, 3) Ultra loose fiscal and monetary policies in US has resulted in negative real interest rates and hence there is no incentive for carry trades. Though ECB also added more to its QE, it is still considered mild to Fed’s QE infinity program and the shift to average inflation target.

This year will also be remembered for 1) The sub zero price for a day in Crude prices. Crude prices have rallied back to USD 50 as Global economy recovered from steep decline following intensive lock down in Apr-May period.

Gold also turned impressive performance and is set to climb again after its recent correction.

Global Equity indices are at new highs. Japanese index scaled multi decade highs.

USD weakness could persist on a milder scale in 2021 and reversal can happen if market attention shifts from low yield differential to relative economic performance.

Currency outlook: Expect USDINR to trade in the 72.75-73.75 range in Jan 2021.

EUR/INR is expected to trade between 87.50-91.40GBPINR is expected to trade in the 97.50-100 levels. JPYINR could consolidate in the 69-72 range.

Outlook for JAN 2021:

Suggestion: USD imports be hedged at 73/72.75/72.40. Exports can be hedged at 73.70 .EURINR imports can be hedged closer to 87.80/87.50. GBP exports can be hedged closer to 100+ levels.

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