Currency Market 5-Feb: RBI Monetary Policy - A Dovish Hold

Globally, financial markets witnessed a relief rally amid PBOC cut interest rate by 10 bps and flushed the banking system with 1.7 trillion Yuan. Consequently, USDJPY spiked to 109.50 and US 10 year bond yields recovered to 1.58%. On other hand, GBP/USD pair tested 1.2940 levels before recovering to 1.3020 levels. Cable has been under significant selling pressure amid concerns over trade agreements. The GBP/USD pair will take further cues from UK’s service PMI and US ISM non-manufacturing PMI numbers.

On domestic front, financial markets are keenly awaiting RBI’s Monetary Policy announcement tomorrow. RBI’s MPC committee is expected to keep interest rates unchanged with repo rate at 5.15%.

	5-Dec (Policy)	5-Feb	Change Since Dec Policy
Crude Oil	63.39	54.63	-13.82%	Positive
Indian Rupee	71.28	71.2	0.11%	Flat
Nifty	12,042.00	11,999.00	0.36%	Flat
India 10 year	6.53%	6.51%	2 Bps Lower	Flat
US 10 year	1.79%	1.59%	20 Bps Lower	Positive
CPI Inflation (Dec)	7.35%		Outside RBI target range	Negative
Trade Deficit (Apr to Dec)	$118.1 Bn		Contracted sharply owing slowing economy	Positive
Fiscal Deficit (FY20)	3.80%		In line with expectation	Positive
Fiscal Deficit (FY21)	3.50%		Conservative estimate of tax collection but high disinvestment target	Neutral
PMI Data (Jan)	55.30		Underscoring the recovery	Positive

Table – Macroeconomic Parameter

Above table takes stock of various macro-economic parameters since last monetary policy on 5^th Dec-19.

Crude prices first spiked to $70 levels amid US-Iran conflict and now have corrected to $54.50 amid concerns of virus. Crude prices are nearly 13% lower from last policy level of 63.39.

Trade deficit (Apr-Dec) fell to $ 118.1 bn as non-oil non-gold imports continue to decline owing to slowing economy.

Fiscal deficit for FY 20 is now pegged at 3.8% against a target of 3.3%. FY-21 fiscal deficit is targeted at 3.5% of GDP. It is noteworthy that for tax collection estimates nominal growth is taken as conservative 10%. Moreover, government has also provide more clarity over off-balance sheet borrowing. One fiscal risk is ambitious 2.1 trillion disinvestment target for next fiscal. Thus, overall fiscal concerns should eased significantly, lending support to continued monetary easing.

CPI inflation has breached MPC’s target range with Jan reading at 7.35%, primarily on account of above 14% food inflation. It is noteworthy that core inflation remained under control at 3.7%. MPC’s view over spike in inflation being transitory or lasting will be closely watched.

Amid this backdrop, it seems that RBI’s MPC should prefer to remain accommodative and should deliver a dovish hold policy tomorrow. Thus, India 10 year bonds might break key support of 6.48-6.50% levels and might test 6.40%.

On currency front, USDINR pair is trading flat at 71.26-27 levels. The immediate resistance for the pair is 71.32-35 levels and first support for USDINR pair is at 71.17 and second support at 71.03 levels. Range for day 71.09-71.35