MONTHLY SYNOPISIS: JUNE 2021

Currency Map:

WT1 Crude: USD 73.47 vs 66.30 in MAY 2021, Brent Crude at 75.38 vs 69.45 in MAY 2021.

Nifty: 15721, UP 0.89% m/m. Gold closed at USD 1770.

Indian 10 Year G-SEC yield closed at 6.04% .

Rupee traded in the 72.45-74.45 range in June. The pair closed at 74.33, registering a gain of 2.35% for USD.  EURINR closed at 88.49, almost flat m/m, and GBP also closed flat m/m. Yen climbed 1.86% against Rupee. USDINR fwd premia softened with 1 year premia declining to 4.35% annualised.

Rupee reversed its prior month’s gain, tracking broad based USD rally against majors and EM Currencies. RBI was not active in sell side intervention, despite steep rally in Crude prices.

RBI kept rates unchanged at 4%. GDP has been revised lower to 9.5%. Inflation is expected to be 5.1% for the full year. RBI has announced another round of G-SEC buying in Q2 to the extent of 1.2 lac cr. RBI Governor said that the central bank has actively intervened on both sides and in spot and fwds in FX market to maintain domestic objectives. FX reserves stands at USD 598.2 bn as on last Friday.

On data front, Indian trade deficit for May stands at USD 6.32 bn. Indian exports is at USD 32.21 bn and imports is at USD 38.53 bn. Current account deficit widened to USD 8.2 Bn in Q4FY21 (1.0% of GDP).For FY21, the current account balance recorded a surplus of 0.9% of GDP vs. a deficit of 0.9% in FY20. BOP surplus for full 2020-21 was at 13 year high of 87.29 bn.

May CPI surged to 6.3%, above RBI target band. April CPI was revised lower to 4.23%. Food inflation in May surged to 5.01%. May WPI climbed even more steeply to 12.94% due to Crude prices.

To mitigate economic negative impact due to Covid second wave, FM announced loan guarantee scheme for 1.1 lac Cr. Health infrastructure projects in Tier 2 and Tier 3 cities will get an allocation of Rs 50000 Cr. Other sectors will receive Rs 60000 Cr.

In June, FII’S have net bought Rs 10251 cr in Equity segment and have net sold Rs 4487 cr of debt. In this financial year, FII’S have net bought Rs 9051 Cr worth of Indian Equities and have sold Rs 4125 Cr worth of Indian debt. In 2020-21 financial Year, FII’S nett bought Rs 2,74,203 Cr of Equities and have sold Rs  42820 Cr in debt.

Indian Equity indices continued to climb higher, though it has steadied after spectacular gains in May. Liquidity is a major driving force in Equity rally.

Rupee’s trajectory will depend on USD’S direction against majors and EM Currencies. USD has turned strong last month. However, there is a chance for correction. It should help Rupee to rebound to 73.80. Expect 73.80-75.30 trading range for July. Exporters can hedge in the 74.75-75.25 zone and importers can wait for pull back to 73.90.

Global developments: US Fed has become cautious after a string of robust economic data and higher inflation. It now expects two rate hikes by 2023. Fed members have started to discuss QE tapering. In fact 4 members expect rate hikes in 2022 itself. Fed upgraded growth and inflation levels. GDP is expected to expand by 7% this year and Core PCE is expected to be 3% as against 2.2% in last forecast. Policymakers acknowledged that the “progress on vaccinations has reduced the spread of COVID-19 in the United States”. Together with “strong policy support, indicators of economic activity and employment have strengthened”.

ECB maintained status quo and signaled it was too early to taper its bond purchases, saying that it expects an accelerated pace of purchases to continue during Q3. ECB now forecasts Eurozone GDP growth of 4.6% in 2021 (compared to 4.0% in March) and 4.7% in 2022 (4.1% in March). For inflation, the ECB expects the CPI to rise 1.9% in 2021 (compared to 1.5% in March) and by 1.5% in 2022 (1.2% in March). 

BoE left Bank Rate unchanged at 0.10% by unanimous vote. BoE said that the “existing stance of monetary policy remained appropriate” to meet the 2% inflation target and to sustain growth and employment.Bank staff have “revised up” Q2 GDP growth expectation by 1.50% since the May MPR, as restrictions on economic activity have eased. CPI inflation is expected to “pick up further above the target” and is “likely to exceed 3% for a temporary period”. 

US and EU data are very solid. EU PMI data indicates that the economy is booming at a pace not seen for 15 years as businesses report surging demand, with the upturn becoming increasingly broad-based, spreading from manufacturing to encompass more service sectors, especially consumer-facing firms. The data set the scene for an impressive expansion of GDP in the second quarter to be followed by even stronger growth in the third quarter.

The focus is firmly on US employment and price pressures. Fed will move to a more neutral to tapering stance if employment returns to pre pandemic level. Despite economic expansion, labor market is still facing a slack and hence investors believe that price pressures will be transitory till employment potential target is met. Inflation will be higher than Fed’s target rate, due to supply side issues. Also, the threat of Delta variant may make policy makers cautious. An even recovery with pre pandemic employment level will be the barometer for Fed to start its QE tapering. But USD‘s move will be decided by the relative real interest rate differentials between USD and its major trading partners.

US non-farm payroll employment grew 850k in June, well above expectation of 675k. Prior month’s figure was also revised up from 559k to 583k growth. Unemployment rate is at 5.9% and average hourly earnings rose 0.3% m/m.

Currency outlook: Expect USDINR to trade in the 73.80-75.30 range in July 2021.

EUR/INR is expected to trade between 87.20-89.50. GBPINR is expected to trade in the 102-104 levels.  JPYINR could consolidate in the 66-68.50 range.

Outlook for July 2021:

Suggestion: USD imports be hedged at 74.30/73.80. Exports can be hedged now at 74.75 and expanded if USDINR hits 75+. EURINR imports can be hedged closer to 88/87.50. GBP exports can be hedged closer to 104+ levels.