Inflationary Pressures Drive Cable!

UK’s CPI inflation has been on an uptrend and spiked to 2.9% in August (Y-o-Y). BoE’s MPC committee has acknowledged that UK’s inflation is likely to remain above its target and might spike above 3% in October. Though, Mark Carney has been suggesting that higher yearly inflation is solely because of weaker GBP/USD levels. But there are few signs of inflation pick-up on a month-on-month basis, as discussed earlier







UK’s monthly CPI inflation, which is by nature volatile due to seasonality spiked to 0.58% in August. It is note-worthy that month-on-month inflation does not have the benefit of lower cable, hence can be attributed to changing dynamics in the UK economy. Going forward, it seems BoE has to act sooner than later to manage inflationary pressure in economy. Interestingly, Carney himself has acknowledged that Brexit would be inflationary in nature amid changing labor market dynamics.

GBPUSD Chart:





Technically, GBP/USD pair has given a clear break-out from channel close to 1.3400 levels and also broken previous high of 1.3450-70. The pair can be bought at current levels of 1.3480-1.3490 range with tight stop loss at 1.3435 level. First target would recent high of 1.3610 and next target of 1.3680, last seen in June 2016



Source: Bank of England

Bloomberg

Office of National Statistics

FX Reserve - 400 Bn Mark!

During one of press meets as RBI Governor, Dr. Raghuram Rajan had talked about creating a bullet proof balance-sheet for the country. These comments were made amid the backdrop of falling rupee, FX reserves and weak macro-economic indicators. India’s macro-economic indicators have improved dramatically as crude tumbled to historic low and India became darling of global investors. Rapid decline in import bill (falling oil-Prices) along with sustained foreign flow in domestic market has led to steady appreciation of rupee viz-a-viz to its global peers and healthy growth of FX reserves.

FX Reserve:

India’s forex reserves, which had come under pressure in 2013, are in touching distance of magic figure $ 400 Bn. Consequently, India has nearly 12 months of import covers instead of just 6 months in 2013. This increase is well supported by sharp decline in India’s import bill, which slumped from $490 bn to $ 382 Bn in 2017. It is note-worthy that there has been sharp decline in overall trade, which is dragging the growth lower.

Forex Buying in Forward Markets:

Ever-since demonetization RBI has been battling with excess rupee liquidity, of nearly INR 3 trillion, using various tools at its disposal. This liquidity overhang has retrained RBI’s ability to buy dollars in spot market, as it will lead to increase in INR liquidity. Consequently, RBI has been actively paying in the forward markets, in various maturities, to delay delivery of INR.








Source- RBI Monthly Bulletin

As above chart depicts, RBI has bought nearly 7 Bn in the forward markets, between 30 June 2017 and 31 July 2017, in the bucket of 3 months and up to 1 year. Though, it is slightly far-fetched, but it seems that RBI believes downside risk of excessive rupee appreciation is more critical than paying forward premium. Going forward, It seems RBI might remain active in forex active to stem excessive appreciaton.

INR 200 Note

Reserve Bank of India had spent nearly INR 80 bn on printing new notes, special thanks to demonetization. Nevertheless, over the years, RBI has been spending close to INR 30 bn to replace soil notes and increase the supply in the system. Recently launched INR 200 note is expected to reduce this cost as it will reduce the numbers of notes required for day to day transaction

Above figure depicts, minimum number of notes required to complete the transaction, with or without INR 200 note.

Above figure depicts, change in physical note requirement for various amount transactions using the integer function.

Above chart depicts, RBI will achieve nearly 12% efficiency by introducing INR 200 note. It can reduce regular note printing cost (INR 30 Bn FY16) by INR 3.6 Bn.