Should RBI wait for Election Results?

Indian politicians are currently busy making promises, irrespective of their feasibility or likely impact on fiscal policy or inflation in general. As Monetary policy tends to act as balancing force amid loosening fiscal policy outlook. Amid this back-drop MPC need to decide – Should it wait for Election Results?

India’s headline inflation remained benign with Jan-CPI at 1.97% and Feb-CPI at 2.57%, well below the RBI target of 4%. It is note-worthy this softness in headline inflation is largely due to lower food inflations as core inflation remained sticky at 5.2% levels.

	2-Apr	7-Feb	Change Feb Policy
Crude Oil	69.05	61.67	11.97%
Indian Rupee	69.11	71.45	-3.28%
Nifty	11,070.00	10,700.00	3.46%
India 10 year	7.40%	7.50%	10 Bps lower
India 2 Year	6.81%	6.50%	30 Bps Lower

As above table shows- Crude oil prices have surged nearly 12% from last policy levels to 69.05 levels. Interestingly, petrol prices for general public has been insulated from rising crude. Mumbai petrol prices rose just INR 2.50 from INR 76 per liter on 7^th Feb to INR 78.50 per liter today. This is just one of many consequences of elections.

Transmission over Rate cut?

RBI’s decision to infuse durable liquidity using USDINR Buy/Sell swap has lead to faster transmission of rate in short term bond yields. India’s 2 year bond yield has corrected nearly 30 bps to 6.50% against 6.80% levels after Feb policy. It is important to note that as much as 20 bps decline in 2 year bond came after announcement of buy/sell swap. Clearly, RBI swap action has led to significant decline in short-term yields.  

Though, lower inflation numbers have provide ample space for rate cut but RBI MPC’s should ‘play-out current session with caution before taking fresh guard after election results’.

India’s Trade Deficit 17 Month low, should we celebrate?

India’s Trade deficit has contracted to USD 9 Bn, nearly a 17 month low levels, in Feb-2019. Though, contracting trade deficit should be seen as a rupee positive development, but one should be wary of the details.

	Jan-19	Feb-19	Change
Exports	26.4	26.7	0.30
Import	41.1	36.3	(4.80)
Oil	11.2	9.4	(1.80)
Gold	2.3	2.6	0.30
Non-Oil and Non Gold	27.6	24.3	(3.30)
Trade Deficit	-14.7	-9.6

As above table shows, India’s exports grew by just USD 0.3 Bn in Feb and imports has reduced sharply by USD 4.8 Bn. Given the decline in crude oil prices, oil imports have declined by USD 1.8 Bn and Gold imports increased by USD 0.3 Bn. The major decline in imports was contributed by non-oil and non-gold imports, which declined by USD 3.3 Bn. There has been a decline in electronics (USD 1 Bn), transport (USD 0.4 Bn) and chemical related products (USD 0.3 Bn). This sharp decline in non-gold-non-oil imports is also sign of slowing domestic economy. Hence, though, contracting trade deficit is a good news but celebration should rather be delayed!

Positional Trade: Sell EUR/USD on Dovish ECB

European Central Bank, in recent monetary policy meet, has reduced the growth and inflation forecast for 2019 and 2020. The worsening economic outlook is in line with recent macro-economic data. Interestingly Mario Draghi might be an lone central banker, who is expected to complete his 8 year term with-out hiking interest rates, ECB suggested that there would be no interest rate hike in the current year.

ECB has finally revisited its TLTRO programme to maintain ample liquidity in the system. TLTRO-III will be available at end of each quarter starting Sep-2019 till March-2021.ECB has also reiterated that it will continue to reinvest its proceeds from maturing bonds.

The EUR/USD pair, which had been trading in a broad range of 1.1260-1.1550 from the last six months, has given a break-down. Going forward, EUR/USD pair can be sold at CMP 1.1230 levels with a stop of 1.1305 and target of 1.1130 and eventual target of 1.1020

Short Term Trade: Intra-day USDINR Buy

The USDINR opened the session on a weak note at 70.10 levels, well below lower end of Bollinger band, against previous close of 70.28 levels. Typically, when price trades outside the Bollinger band, prices tend to back come inside the band region. This price-action gives a short term trading opportunity to buy USD/INR at CMP 69.96 levels with stop below 69.80 levels, previous lows on daily chart, with target of 70.22 levels.

This technical call only for intra-day. 

Short Term Trade: Intra-day USDINR Buy

The USD/INR pair opened the session at 70.48 levels, well below lower end of Bollinger band levels of 70.61 levels. Typically, when price trades outside the Bollinger band, prices tend to back come inside the band region. This price-action gives a short term trading opportunity to buy USD/INR at CMP 70.45 levels with stop below 70.35 levels, there is has multiple support on daily chart, with target of 70.65 levels.

ECB: Dovish Draghi Vs Optimist Draghi!

First Published: 24-Jan-2019

First thing first, Euro area growth has been facing headwinds for quite some time now. As shown in the table below, Industrial production declined by 1.7% in December. If that’s not enough, business surveys are pointing towards tough times ahead. Euro Area manufacturing PMI fell to a two year low of 51.2 levels and service PMI fell to a 4 year low of 51.2 levels. Despite this back-drop, ECB has successfully concluded its massive bond buying programme in December.

Indicator	Latest Reading
EURO Manufacturing PMI	51.4
Euro Service PMI	51.2
Ifo Business Climate	101
Industrial Production (M-o-M)	-1.70%
Headline Inflation	1.60%

German 10 year bond yields continued to trade near 18 month low of 0.22%. Though, Low German yields can partly be attributed to global trend and lower crude prices, but it also underlines tepid economic and inflation outlook in Euro Area.

Amid this backdrop, ECB is expected to keep its monetary policy stance unchanged but market would be more concerned about tone of Mario Draghi. It would be interesting to know, how ECB is accessing current headwind is temporary or they are worried about pro-long low growth period. 

Clearly, there are two choices for Draghi. Either, to be optimistic and suggest that recent headwinds are temporary or turn dovish on account slowing global and Euro area growth. As history teaches us, between dovish and optimistic Draghi there is no choice at all.

Short Term trading opportunity - Sell EUR/USD at CMP 1.1385 with a stop above 1.1430 and first target of 1.1305 and second target of 1.1265

Monetary Policy: Feb Rate cut fair possibility!

During December monetary policy, majority of MPC committee argued in favour of wait and watch strategy to judge the path of unusually low food inflation and volatile crude oil prices. As discussed earlier  India experienced two positive surprises during Oct-December quarter. On one-hand crude oil prices slumped nearly 25% and food inflation collapsed, now posing a risk of agrarian crisis.

	5-Oct	7-Dec	15-Jan	Change Oct Policy	Change from Dec Policy
Crude Oil	84.16	61.67	59.68	-29.09%	-3.23%
Indian Rupee	73.8	70.8	70.9	-3.93%	0.14%
Nifty	10,261.00	10,693.00	10,834.00	5.58%	1.32%
India 10 year	8.02%	7.45%	7.47%	57 Bps lower	55 Bps lower
1 Year OIS	7.33%	6.75%	6.50%	58 Bps Lower	25 Bps Lower

Crude oil prices have remained below 63 handle while testing a low of 50.84. This softness in crude oil prices have eased fuel inflation to 4.54%, while comforting other macro-factors like fiscal and current account deficit. On other hand, December CPI inflation slumped to 18 month low of 2.19%. The decline in CPI inflation is led by deflationary food prices, which remained in negative territory for third consecutive month at -1.69%. Tracking these development, INR 1 year OIS swap has declined steadily from 7.33% in Oct to 6.50%.

Given this back-drop, there is fair possibility of interest rate cut by MPC on Feb-7. The risk to this view is worsening fiscal deficits at state and central level.