MONTHLY SYNOPISIS: SEP 2021

Currency Map:

WT1 Crude: USD 75 vs 68.50 in AUG 2021, Brent Crude at 79.10 vs 72.25 in AUG 2021.

Nifty: 17618, UP 2.83% m/m. Gold closed at USD 1756.

Indian 10 Year G-SEC yield closed at 6.21% .

Rupee traded in the 72.92-74.36 range in Sep. The pair closed at 74.24, registering a decline of 1.7% for Rupee.  Sept price action reversed Aug gains for Rupee. EURINR closed at 86.14, decline of 0.19% m/m, and GBP declined 0.56% m/m. Yen closed flat against Rupee. USDINR fwd premia steadied with 1 year premia trading in the 4.38% range annualised. Indian 10 Year G-SEC yields steadied at around 6.22%. FX reserves swelled to USD 640 bn.

Rupee tracked weakness of crosses and EM Currencies against USD. USD gained on sustained inflation in US, likelihood of early QE taper and risk aversion. USDINR traded to 74.35 and pulled back on PSU banks Dollar sales. Steep rally in crude prices may force RBI to stem Rupee fall due to the twin impact of Crude rally and Rupee fall on inflation. Expect USDINR to trade in the 73.60-74.60 range in Oct.

Sept month is marked by major policy announcements. Govt of India announced PLI scheme for auto industry and drone manufacturing. Telecom companies have been given moratorium for spectrum fees. 100% FDI has been allowed in telecom. Union Cabinet approved a government guarantee of up to Rs 30,600 crore for security receipts to be issued by National Asset Reconstruction Company Ltd (NARCL). NARCL will buy non-performing assets from banks. Govt is also setting up Indian debt resolution company to manage NPA’S. The government guarantee effectively offers to pay the difference between the face value and realised value of the security receipts issued by NARCL. FM said that in the last six financial years, banks have recovered Rs 5,01,479 crore. Of this Rs 3.1 lakh crore have been recovered since March 2018.                                                          

There are reports that Air India will be sold to Tata Group.

On data front, Indian CPI declined to 5.3% in Aug from 5.9% in July. Food inflation moderated to 3.11%. IIP climbed 11.5% in July. Manufacturing grew by 10.5% in July. The mining sector output rose 19.5 per cent in July while power generation increased 11.1 per cent. Indian Exports climbed 45.8% in August to touch USD 33.28 bn. Imports climbed to USD 47.09 bn. Trade deficit was higher at USD 13.81 bn. Exports in Apr-Aug period stands at USD 164.2 bn. India recorded USD 6.5 bn current account surplus in Q1 FY22. This is apprx 0.9% of GDP. In Q4 21, deficit was at 1% of GDP. Capital account recorded surplus of USD 25.8 bn in Q1 FY22. This is against USD 12.3 bn in Q4. FDI inflows contributed to capital account surplus.

GST collections climbed to 1.17 trn in Sept.

Indian PMI (mfrg) climbed to 53.7 in Sept from 52.3 in August. The growth in September was backed by stronger new order inflows, and companies scaling up input buying to accommodate rising sales and progress with production schedules. The uptick in input buying came on the back of anticipation that production would increase in the year ahead.

Fiscal deficit was markedly lower at 31.1% of Budgeted estimate. Revenue is at 7.9 trn, 44.4% of budgeted estimate. In absolute terms, Fiscal deficit is at 5 year low as on Aug end. Fiscal deficit can surprise on the lower side as compared to budget estimate of 6.8%.

In Sept, FII’S have net bought Rs 7662 cr in Equity segment and have net bought Rs 11523 cr of debt. In this financial year, FII’S have net bought Rs 5287 Cr worth of Indian Equities and have bought Rs 19388 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.

Global developments: Fed’s meeting, soaring energy prices and Chinese real estate company’s payment defaults took the center stage of Sept developments.

USD gained against crosses, Crude rallied and Equities declined. Equity indices were weighed down by early stimulus withdrawal and pandemic fed economic slow down.

Fed maintained status quo, but it was categorical that asset purchase tapering is warranted sooner than later. Tapering could start by Nov and end by mid-2022. 7 out of 9 members felt that rate hike is warranted in 2022. Fed Chair Jerome Powell reiterated that he believed the U.S. economy had already surpassed the central bank’s goals for inflation, and said a “reasonably good” September jobs report would indicate that the Fed’s employment goals to begin tapering had been satisfied as well. 

After Fed meeting, Fed Chairman in his testimony to US Congress said that inflation is elevated and will remain so for some more period before moderating. He has now withdrawn word “transitory”. This is considered as mini taper tantrum. Soaring energy prices, steep container freight rates and rising consumption along with supply bottlenecks are likely to keep US inflation elevated. ECB is yet to recognise this problem and ECB Chief maintains that inflation is temporary. US-EU inflation differentials is steep, warranting greater QE tapering by US. US Fed is now behind inflation curve and hence withdraw QE faster than anticipated before, possibly triggering higher USD.

ECB took the decision of ending front loading of PEPP asset purchases and acknowledged inflationary pressure. ECB Chief said that this is not tapering and added that the economy is still not out of problems. On the economic developments, Lagarde reiterated that risks for the economic outlook were “broadly balanced” and “price pressures are building only slowly”. She added that “there remains some way to go before the damage done to the economy by the pandemic is undone”. The central bank upgraded GDP growth forecast to +5% y/y from this year, while keeping projections broadly unchanged for 2022 and 2023.

Eurozone GDP grew 2.2% qoq in Q2, revised up from prior estimate of 2.0% qoq. Comparing with same quarter of previous year, GDP grew 14.3% yoy. Ifo lowered Germany growth forecast for 2021 sharply from 3.3% to 2.5%. But 2022 growth forecast was upgraded by 0.8% to 5.1%.

UK Q2 GDP growth was finalized at 5.5% qoq, revised up from 4.8% qoq. GDP remained -3.3% below the pre-pandemic level at Q4 2019.

Japanese GDP growth was finalized at 0.5% qoq, 1.9% annualized in Q2. It’s upgraded from initial estimate of 0.3% qoq, 1.3% annualized. BoJ left monetary policy unchanged. Under the yield curve control framework, short term policy interest rate is held at -0.10%. 10-year JGB yield target is kept at around 0%, without upper limit on bond purchases. Overall assessment on the economy was maintained as it has “picked up as a trend” but “remained in a severe situation” due to the pandemic home and abroad. But it noted that some exports and production have been “affected by supply-side constraints”.

OECD lowered 2021 global growth forecast slightly to 5.7%, down from May’s projection of 5.8%. 2022 global growth was revised slightly higher to 4.5%, up from 4.4%. It added, “the global economy is growing far more strongly than anticipated a year ago but the recovery remains uneven, exposing both advanced and emerging markets to a range of risks”. “Consumer price inflation in the G20 countries is projected to peak towards the end of 2021 and slow throughout 2022. Wage growth remains broadly moderate and medium-term inflation expectations remain contained.” Indian GDP is expected to climb by 9.9% in 2021-22, as per OECD.

Higher Oil and coal prices, demand for more power, supply issues in natural gas and Chinese decision to cut emissions have contributed to more factory shut downs in China. This could derail supply chain and keep inflation higher. OPEC is meeting this week and there will be relief if OPEC raises output.

All in all, expect USD strength, wobbly Equity markets and higher energy prices.US non-farm payrolls is another important data event in upcoming week.              

Currency outlook: Expect USDINR to trade in the 73.60-74.60 range in Oct 2021.

EUR/INR is expected to trade between 85-86.80. GBPINR is expected to trade in the 99-101 levels.  JPYINR could consolidate in the 66-68.50 range.

Outlook for OCT 2021: