MONTHLY SYNOPISIS: FEB 2021

Currency Map:

WT1 Crude: USD 61.60 vs 52.10 in JAN 2021, Brent Crude at 64.95 vs 55 in JAN 2021.

Nifty: 14529, UP 6.5% m/m. Gold closed at USD 1732.

Indian 10 Year G-SEC yield closed at 6.23% .

Rupee traded in the 72.28-73.51 range in Feb. The pair closed at 73.44, registering a decline of 0.67% for Rupee.  EURINR closed at 89.10, up 0.79% m/m, while GBP climbed 2.71 m/m. Yen declined 1.20% against Rupee. USDINR fwd premia climbed with 1 year premia hitting 5.3% annualised.

Rupee which was gaining till Feb 25 th, fell 1.35% on a single day (Friday) and has masked its actual performance for most part of last month. Rupee declined last year in March/April as pandemic gripped and lockdown was imposed. However, recovery was also swift as funds flowed into the country due to global liquidity. Though Global liquidity remains unchanged and policy makers have assured of low rates for next few years, market consensus is building towards higher inflation. Surge in commodity prices including crude and Copper have exacerbated inflation fears. Surge in US, European yields kept Indian yields high. Govt’s fiscal stimulus and borrowing programme have pushed long term yields higher.

FII’S continued to invest in Indian Equities and flows accelerated after budget. Govt’s capex thrust and orientation towards private sector along with creating asset management company for bank bad loans single handedly changed market perception on Govt reform intentions. PLI schemes for more products were announced. Credit Guarantee schemes, asset monetisation and greater involvement of private sector in economic building were other highlights of the budget and recent announcements.

On data front, GDP data brought cheer back. Indian Q3 GDP climbed 0.4%, signaling end of recession. Manufacturing grew by 1.6%, agri sector grew by 3.9%, and construction grew by 6.2%. Services remained in contraction mode at -1.6%. Mining contracted 5.9% and trade, hotels and transport contracted by 7.7%.Economy had contracted by 24.4% and 7.3% in Q1 and Q2. Govt expects GDP to contract by -8% in 2020-21. GDP is expected to be between 10 and 12% in coming fiscal.

Exports rose 6.16% to $27.45 billion in January, while imports also grew 2% to $42 billion. Trade deficit was reported at 14.55 bn.

IIP climbed 1% in Dec 2020. Mfrg grew 1.6%, power sector grew by 5.1%, mining contracted -4.8%. The industrial growth so far in the fiscal year 2020-21 (April-December) has contracted -13.5 per cent, compared to a 0.3 per cent rise in the corresponding period a year ago, the data showed. Auto sales climbed 11% in Jan.

Retail inflation declined to 4.06% in Jan as against 4.59% in Dec. Food inflation fell to 20 month low of 1.89%. According to RBI:The outlook for core inflation is likely to be impacted by further easing in supply chains; however, broad-based escalation in cost-push pressures in services and manufacturing prices due to increase in industrial raw material prices could impart upward pressure,”.

RBI Governor said that liquidity is comfortable and added that many instruments are available to ensure ample liquidity at appropriate time. RBI kept rates and monetary stance steady. As per RBI Projection, GDP is expected to be 10.5% for next fiscal and inflation is expected to be between 5 and 5.2%.

FII’S nett bought Rs 27918 Cr of Indian Equities in Feb . FII’S nett sold Rs 692 Cr of Indian debt securities in Jan . In this financial year, FII’S have nett bought Rs 258565 Cr of Equities and have sold Rs  30624 Cr in debt. In FY 19-20, FII’s sold Rs 10200 Cr of Equities and 47393 cr of debt. It should be noted that FII’S sold Rs 12800 Cr in equity segment on Friday.

Strong PMI data, auto sales and Govt’s structural reform push should continue to help economic recovery. Once the Global yield surge is tamed, inflows could be back and Rupee could recover. Equity market rally is not far off and recent correction will be invested.

Technically, USDINR has strong supports at 72.95/72.75/72.30. It has to clear 74 to resume long term strength for USD.                                                                                 

Global developments: It was a month for Pound. Pound rallied to 1.4250 and looks strong. UK’S exit from EU and vaccination push has helped Pound gain against USD. USD’S performance against Euro and Yen are tied to differential Yield rise. US 10 Year yield climbed vertically to 1.6%. Short squeeze in bond market spilled over to Equity and FX markets. Gold declined steeply to USD 1732. Its last year high was around USD 2000. Crude and Copper surged. Crude surged over 20% last month alone.

Global data showed that recovery is still on a single track of manufacturing. Robust PMI data offers hope. Services sector still remained stressed due to lock down restrictions. Vaccination efforts are proceeding more smoothly in US than in EU.

Economic data from US is encouraging. US manufacturing and business spending on equipment also appears to be off to a strong start in 2021. Durable goods orders jumped 3.4% in January. During January, personal spending increased at a robust 2.4% pace. The strong monthly gain in consumption arrived alongside a 10.0% surge in personal incomes.

FOMC minutes for the January meeting revealed that policymakers were cautiously optimistic over the economic outlook. Meanwhile, it also dampened hopes of tapering. The minutes reaffirmed the guidance that asset purchases would continue at the current pace “until substantial further progress toward its employment and inflation goals had been achieved”.  

Fed Chairman in his testimony also said that the economy is still far away from its employment goal and hence liquidity and low rates will continue in foreseeable future. This comes in the back drop of recent surge in long term yields.

BoE kept monetary policy unchanged as widely expected. BOE pledged that, “if the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit.”

Eurozone GDP contracted -0.7% qoq in Q4, smaller than expectation of -1.8% qoq. Over the year, GDP contracted -6.8% yoy. European Commission downgraded 2021 growth projection of EU to 3.7% (from Autumn’s 4.1%) and Eurozone to 3.8% (from 4.2%. But it upgraded 2022 growth projection of EU to 3.9% (from 3.0%) and Eurozone to 3.8% (from 3.0%).

Japanese GDP grew 12.7% annualized in Q4, well above expectation of 9.5%. On quarterly terms, GDP grew 3.0% qoq, beat expectation of 2.3% qoq.                 

Focus in coming weeks will be on policy maker’s response to tame surge in long term yields. Once market is convinced of central banks determination, asset markets will climb back and USD will be on back foot again. 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 72.75-74 range in March 2021.

EUR/INR is expected to trade between 88-90.70. GBPINR is expected to trade in the 99.50-103.50 levels.  JPYINR could consolidate in the 67.50-70.50 range.

Outlook for Mar 2021:

Suggestion: USD imports be hedged at 72.95/72.75. Exports can be hedged at 73.80/74. EURINR imports can be hedged closer to 88.50/88.10. GBP exports can be hedged closer to 103.50+ levels.

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