Tag: US Federal reserve

Morgan Stanley downgrades India to equal-weight, BFSI News, ET BFSI

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Morgan Stanley has downgraded India and Brazil equities to equal-weight while upgrading the Indonesian market to overweight position.

Morgan Stanley said it expects a structural multi-year earnings recovery in India, but at 24 times forward price to earnings it will look for some consolidation ahead of US Federal Reserve‘s tapering, an RBI hike in February and higher energy costs.

“We move tactically equalweight on India equities after strong relative gains – we expect a structural multi-year earnings recovery, but at 24 times forward price to earnings, we look for some consolidation ahead of Fed tapering, an RBI (rate) hike in February and higher energy costs,” said Morgan Stanley.

MSCI India has gained 26% in the last 6 months, outpacing the MSCI Emerging Markets index by 30% over the same period. Morgan Stanley said this strong outperformance is partly due to bullish consensus earnings expectations and a favourable reform agenda.

Morgan Stanley in a recent note had said that early signs of capital expenditure, supportive government policy for higher corporate profit share in GDP and a robust global growth outlook will help India enter a new profit cycle, which may result in earnings compounding at over 20% per annum for the next three to four years.

However, the financial services firm said that valuations are increasingly constraining returns over the next three to six months.

“Notwithstanding the already-sharply upgraded consensus earnings through 2021, India’s 12-month forward P/E ratio has moved to an all-time high of 24.1 times. As a result, India is the most expensive market in our model on EM-relative 5-year trailing z-score of P/B and P/E,” said Morgan Stanley. Indices may take a breather from here and look for some consolidation, said Morgan Stanley, adding that it prefers consumer discretionary and financials while avoiding the technology and healthcare sectors.



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Wells Fargo report, BFSI News, ET BFSI

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The financial sector accounts for 19% of the country’s GDP, up from 13% in 2000.

As banks bet more on digital banking, nearly 100,000 positions in US banks are at stake and could vanish over the next five years, a report by Wells Fargo said.

Large US banks are investing more in digital banking and other technologies, which could vanish roles of branch managers, call center employees and tellers, leading to massive job cuts in the sector.

Disappearance of such jobs could be drawn parallel with the massive contraction in manufacturing work in the 1980s and ’90s, according to the report.

“Our conclusion is still that this will be the biggest reduction in US bank headcount in history,” the analysts wrote, with job cuts accelerating once the economy fully recovers from the COVID-19 pandemic.

These roles are predicted to be replaced by artificial intelligence, cloud computing and robots. These technological advances are set to perform daily banking functions like taking payments, approving loans and detecting fraud, the report said.

“Branches will likely show a decline, especially given greater digital banking adoption during the pandemic. Many branches that were closed during the pandemic will likely remain closed permanently [and] new future mergers will likely reduce branches, too,” the report said.

The financial sector accounts for 19% of the country’s GDP, up from 13% in 2000. Since the 2008 financial crisis, big banks have continued to witness larger growth. However, between 2007 and 2018, rapid automation in the sector led the country’s four largest banks to reduce staff by a combined 3,00,000 positions.



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Central banks parse inflation risk as turn from pandemic policy begins

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Central banks that launched massive emergency support to fight the pandemic last year are now planning a global turn in the other direction, with gaps already emerging in their perceived risk of inflation, the need to respond to it, and the pace of the likely return to normal monetary policy.

They are confronted with common supply shocks and common risks around a pandemic that continues to shape commerce.

“Globally, we are still in for a long process,” of reopening and adapting to the post-pandemic economy, St. Louis Federal Reserve President James Bullard said this week in a Reuters interview.

But the reopening, and particularly the associated inflation, is being felt differently across the developed world, testing officials’ understanding of the post-pandemic economy and their ability to hit a shared 2 per cent inflation target without derailing global growth.

The heads of the world’s four major central banks gather for a mostly virtual European Central Bank forum on Wednesday, and if last year was marked by a uniform rush to stave-off the worst, their exit strategies are already diverging.

That’s led to major policy scuffling both in Europe and the United States over how much inflation risk central banks should tolerate as they try to make up for sluggish prices in the years since the Great Recession a decade ago – a major gamble, ineffect, over whether the post-pandemic world will work the same as before.

Policy divergence among the world’s major central banks can influence markets worldwide, shifting capital flows, exchange rates and trade patterns. There may even be limits on how far a central bank like the Fed might go in normalising policy or raising interest rates if major partners like the ECB aren’t moving in the same direction.

It is still early in the transition from the pandemic, but differences are already emerging.

“The key challenge is to ensure that we do not overreact to transitory supply shocks,” ECB President Christine Lagarde said at her bank’s premier research conference on Tuesday, and policy “must remain focused on steering the economy safely out of thepandemic emergency” rather than squelching any short-term increase in prices.

Like the ECB, the Fed is also banking on inflation easing largely on its own. But discussion of the risks has become more prominent, and in projections last week virtually all Fed officials said it was more likely inflation would run hotter than expected than otherwise.

Even as Lagarde spoke, Fed Chair Jerome Powell testified to the US Congress about “bottlenecks, hiring difficulties, andother constraints” that have led the Fed to project inflation this year at 4.2 per cent, twice the official target, and may make it more persistent.

Cost-of-living Crisis?

The potential problems are manifold. The pandemic still rages, and while businesses and consumers have adapted to a large degree, it still shapes who is showing up for work, what goods and services get produced, and how fast those goods are moved around the planet and how smoothly those services are delivered.

Workers are moving back into jobs, but more slowly in many places than anticipated. The supply shocks that began with the first coronavirus shutdowns in 2020 continue to reverberate,whether in the form of fuel shortages in the UK, German autoplants waiting for computer chips, US factories lacking industrial goods, backlogged shipping routes, or rising prices.

The Fed last week said it was nearing its first steps to wind down the emergency bond-buying launched in March of 2020, and half of US policymakers at their most recent meeting now say interest rates may need to increase next year.

For the Bank of England, the tipping point may already be in view, with markets expecting a rate increase no later than February, and yearly price increases of 4 per cent beginning to show inpublic opinion.

“Talk of a ‘cost of living’ crisis is gaining traction …and the public may be looking at the BoE to lean against inflation risks coming out of the pandemic,” Deutsche Bank economist Sanjay Raja wrote in a note to clients on Friday.

Japan’s core consumer inflation index, by contrast, remained flat in August, indicating that country’s decades-long battle with weak prices continues. Wholesale prices are rising, pushed by global commodities inflation, but growth is weak and Bank of Japan policy expected to remain loose.

The ECB has downplayed any post-pandemic policy shift.

Bond-buying through its Pandemic Emergency Purchase Programme will decline under the legislation that authorised it. But the bank is expected to expand other programmes to partly compensate, with Lagarde arguing inflation remaining below the 2 per cent target is a bigger risk than prices soaring persistently above it.

Looking back on the last decade it’s a natural concern.

By 2012, all the major central banks had fixed 2 per cent as their preferred inflation target, then proceeded to persistently run short of it through a decade of sluggish growth.

The policy bias is now to err on the other side – and to hope the world co-operates.

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NARCL may not hit this year’s fiscal outgo, says DBS Research, BFSI News, ET BFSI

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India’s bad bank is unlikely to impact this year’s fiscal outgo, according to a report by DBS Research.

The transfer of assets from banks to the National Asset Reconstruction Company Ltd (NARCL) will be in the form of ‘contingent liability’, which will be invoked when there is a shortfall upon resolution or liquidation.

Also read: Banks may sell Rs 1 lakh crore of fraud-hit loans to NARCL, ARCs

The transfer is likely to free up capital for banks, and price discovery is likely to be addressed by bad assets being bought at net book value, the report said

However, gross Non Performing Assets are likely to correct to the scale, while net NPAs will be a little changed.

Reform fine tuning, such as the announcement of the bad bank, strong external buffers, domestic equity outperformance and improving fiscal math have been positive for India’s economic narrative.

Also read: What are NARCL and IDRCL? How do they work and what is the plan?

India’s financial markets, including rupee, are no longer a part of the fragile five pack of economies, even as the US Federal Reserve prepares to taper its purchases of securities and bonds.

During the taper tantrum episode in 2013, India was part of the “Fragile Five,” representing a group of emerging market economies which were running weak external accounts and had poor cover for the external funding.

Compared with 2013, the rupee will be more resilient when the US Fed tapers asset purchases this time. The brokerage expects the Indian Rupee to hold its COVID-19 range of Rs 72-77 per US dollar into 2022.

India’s fiscal performance has been surprising this year, with the deficit reaching only 21.3% in April-July of the budgeted estimate, lower than 103% in April-July 2020, DBS Research said.

Revenues are outpacing expenditure, with net tax revenues at 34% in April-July, against 12.4% a year ago, and non-tax revenues at 58%, against 6.4% last year.

The onset of the third COVID-19 wave is likely to be less fatal as the economy seems to be having a better shock absorption capacity, the research said.

According to the report, employment, power consumption, and other indicators have reached pre-pandemic levels, benefiting from lower curbs but levelling off at highs into September.

However, this is unlikely to upgrade India’s overall sovereign rating. DBS Research expects ratings to be status quo.



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Know how banks, financials performed this week, BFSI News, ET BFSI

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The Indian market seems to be in roaring bull phase, with the BSE Sensex hitting 60,000 points for the first time ever on Friday. However, the market did face some volatility this week, but investors were prompt to take the corrections as a buying opportunity.

The Sensex completed a 10,000-point journey to the 60,000-mark within months, having hit 50,000 in intraday trade for the first time in January 2021.

This is almost a global phenomenon, with China, Hong Kong and a few other countries being among exceptions as they reel in the budding Evergrande crisis. The mother market US, is leading the bulls, dismissing tapering indications from the US Federal Reserve.

Stock-specific moves, developments around China’s economy, US Fed meeting, revival of activity in Europe, improving economic data, strong vaccination numbers and healthy pick up in daily inoculations were considered to be key driving factors this week.

Monday Closing bell: Dalal Street painted red, banks and financials highly underperform

The BSE Sensex closed the day 525 points lower at 58,491. During the day, it touched a high of 59,203 and a low of 58,390. Only six of the 30 Sensex stocks ended in the green, while the Nifty50 fell 1.07% to end below the 17,400-mark at 17,396.

Broader markets also languished in trade, ending the day with deep cuts. The BSE MidCap fell 1.79% and SmallCap was down 1.84%.

The Nifty PSU Bank index majorly underperformed, closing down 4.18%. Nifty Bank ended 1.76% lower at 37,175, while Nifty Financial services ended 1.61% lower at 18,177. Bajaj Finserv was among the top Sensex gainers while SBI, Induslnd Bank and HDFC were top laggards.

Tuesday Closing bell: Indices witness smart recovery, end in green

The Indian market witnessed a smart recovery after Monday’s fall on the back of a recovery in US futures and Europe markets. At close, the Sensex was up 0.88% at 59,005, and the Nifty50 was up 0.95% at 17,562. BSE MidCap index rose nearly 1%, while the SmallCap ended flat with a positive bias.

Nifty PSU Bank ended flat with a negative bias, down by 0.05%. Bank Nifty staged a recovery to end at 37,235, with gains of 0.24%, while Nifty Financial services ended 0.73% higher at 18,310. Bajaj Finance was the top Sensex gainer on closing, up 5%, followed by IndusInd Bank and Bajaj Finserv were top Nifty gainers.

Wednesday Closing bell : Indices end flat with negative bias, banks, financials underperform

Benchmark indices Sensex and Nifty50 witnessed a tug-of-war between bulls and bears on Wednesday before closing with marginal losses. On the closing bell, BSE Sensex settled at 58,927, down 0.13% while the NSE Nifty50 closed at 17,546, slipping 0.09%.

The Nifty PSU Bank finished the day with 0.48% gains. Bank Nifty slipped 0.78% giving up 37,000 mark at 36,944, while Nifty Financial Services closed 0.86% lower at 18,152. HDFC was the worst-performing Sensex constituent, falling 1.39%, followed by ICICI Bank, Kotak Mahindra Bank and HDFC Bank.

Weekly Market Wrap Up: Know how banks, financials performed this week

Thursday Closing bell: Indices end at all-time highs; banks, financials gain over 2% each

Indian benchmark indices extended early gains and hit record high levels with the Sensex closing at 59,885, up 1.63%, and Nifty50 at 17,823, up 1.57%. The broader market outperformed the benchmarks, as BSE MidCap and SmallCap indices rose 1% each.

Bank Nifty surged 2.24% to close at 37,771, while Nifty Financial Services closed 2.28% higher at 18,566. Nifty PSU Banks finished the day with 1.19% gains. Bajaj Finserv, HDFC, Axis Bank, IndusInd Bank, State Bank of India were top Sensex gainers

Friday Closing Bell: Fresh record closing highs; Nifty ends above 17,850, Sensex crosses 60K.

The BSE Sensex crossed 60,000 for the first time ever, while the Nifty50 closed above the 17,850 level. At close, the Sensex was up 0.27% at 60,048 and the Nifty50 was 0.17% higher at 17,853. BSE MidCap index fell 1%, while smallcap index was down 0.3%.

Bank Nifty gained 0.16% to end at 37,830, while Nifty Financial Services ended at 18,630, up 0.34%. HDFC Bank, ICICI Bank and HDFC were among the top index gainers. SBI, Axis Bank and Bajaj Finance were among top laggards. The Nifty PSU Bank index shed 1.62%, dragged by losses in shares of Bank of Baroda and Canara Bank.

Key Industry takeaways

Kotak Mahindra Bank forays into healthcare financing

 Weekly Market Wrap Up: Know how banks, financials performed this week

Kotak Mahindra Bank (KMBL) on Tuesday announced that it has launched healthcare financing solutions, ranging from healthcare infrastructure loans, medical equipment finance and unsecured healthcare loans, aiming to cater to key stakeholders.

KMBL has introduced the offerings at attractive interest rates, and includes lending facilities such as the Insta Programme for quick approval of loans up to Rs 50 lakh.

Retail depositors earning negative returns; equities boom gives leeway to raise rates: SBI

Weekly Market Wrap Up: Know how banks, financials performed this week

The current bull run in financial markets is possibly a break from the past as households and now the opportune time to revisit the taxation of interest on bank deposits, said SBI.

Economists believe that, Retail depositors are earning negative returns on their bank deposits and hence, there is a need for reviewing taxes on interest earned.

If not for all the depositors, the taxation review should be carried out for at least the deposits made by senior citizens who depend on the interest for their daily needs, the economists led by Soumya Kanti Ghosh said in a note, which pegged the overall retail deposits in the system at Rs 102 lakh crore.

IIFL Finance to raise up to Rs 1,000 crore via secured bonds

Weekly Market Wrap Up: Know how banks, financials performed this week

Fairfax-backed IIFL Finance plans to raise a Rs 1,000-crore public issue of secured bonds on September 27 for business growth and capital augmentation. The bonds offer up to 8.75% yield and are rated AA/Stable by Crisil and AA+/negative by Brickwork.

The size of the issue is Rs 100 crore, with a green-shoe option to retain over-subscription up to Rs 900 crore (aggregating to a total of Rs 1,000 crore).

“The funds raised will be used to meet the credit need of more such customers and accelerate our digital process transformation to enable a frictionless experience,” IIFL Finance CFO Rajesh Rajak said.

Govt may block Chinese investment in LIC IPO as company a ‘strategic asset’

Weekly Market Wrap Up: Know how banks, financials performed this week

The government wants to block Chinese investors from buying shares in Life Insurance Corp (LIC), underscoring tensions between the two nations. State-owned LIC is considered a strategic asset, commanding more than 60% of India’s life insurance market with assets of more than $500 billion.

India has sought to limit Chinese investment in sensitive companies and sectors, banned a raft of Chinese mobile apps and subjected imports of Chinese goods to extra scrutiny.

“With China after the border clashes it cannot be business as usual. The trust deficit has significantly widen(ed),” a government official said, adding that Chinese investment in companies like LIC could pose risks, according to a report.

Govt extends Uday Kotak’s term as IL&FS chairman by 6 months

Weekly Market Wrap Up: Know how banks, financials performed this week

The government on Wednesday extended the term of Uday Kotak as non-executive chairman of debt-ridden IL&FS group by another six months.

The government through a gazette notification extended the term of Kotak, who is also the managing director and chief executive officer of Kotak Mahindra Bank, till April 2, 2022.

The notification was issued by the department of financial services in the ministry of finance dated September 21, 2021.



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Gold prices flat as markets await Fed tapering timeline, BFSI News, ET BFSI

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Gold prices were flat on Tuesday as investors adopted a risk-averse stance amid caution ahead of US Federal Reserve‘s policy meeting where the central bank is expected to provide cues on when it will begin tapering its asset purchases.

Bullion is considered as a hedge against inflation and currency debasement likely resulting from the widespread stimulus. A hawkish move by the Fed would diminish gold’s appeal, while an eventual interest rate hike would also raise the opportunity cost of holding the non-interest bearing asset.

FUNDAMENTALS
Spot gold was steady at $1,763.60 per ounce, as of 0123 GMT.

Prices had recovered on Monday from an over one-month low on safe-haven demand as China’s Evergrande debt woes fuelled sharp sell-off in stocks worldwide.

US gold futures were flat at $1,764.40.

Worries about the fallout from property developer Evergrande’s solvency issues spooked financial markets and lifted the dollar index, which hit a near one-month peak on Monday. A firmer dollar generally makes bullion more expensive for other currency holders.

Fed is likely to provide an outlook on how soon and how often they think the economy will need interest rates rises over the next three years when they release new forecasts at their policy meeting on Wednesday.

The volume of the European Central Bank‘s bond purchases is becoming “less important” as the economic outlook improves and the money-printing scheme becomes a tool for guiding rate expectations, ECB board member Isabel Schnabel said on Monday.

Russia’s gold reserves stood at 73.8 million troy ounces as of the start of September, the central bank said on Monday.

Silver edged up 0.1% to $22.26 per ounce, having hit a more than nine-month low of $22.01 in the previous session.

Palladium climbed 0.6% to $1,896.30 after slumping to its lowest level since June 2020 on Monday.

Platinum rose 0.5% to $915.05, having touched a 10-month low on Monday.



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Dollar drifting as traders turn to central bankers, BFSI News, ET BFSI

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SINGAPORE: The dollar hovered near recent lows on Tuesday as traders braced for a slew of central bank meetings from Australia to Europe and Canada this week, looking for any signs that they are making progress towards policy normalisation.

The possibility of a tapering delay in the United States, after weaker-than-expeced jobs data on Friday, has put extra focus on policymakers elsewhere and put pressure on the dollar.

First up is Australia, where an announcement is due at 0430 GMT. The Australian dollar has paused a recent rally as markets wait to see whether lockdowns in Sydney and Melbourne have derailed plans to taper bond purchases.

The Aussie last bought $0.7447.

If the central bank pauses its tapering plans, traders are likely to sell the currency, possibly pushing the Aussie towards its support level around $0.7420, according to IG Markets analyst Kyle Rodda. A hawkish central bank would send the currency higher, he said.

Markets are also awaiting Chinese trade data due around 0300 GMT, expected to be weighed down by a slowdown in growth and disruption from COVID-related port closures.

On Wednesday, the Bank of Canada is expected to keep rates steady, but to maintain on course for a hike before the end of the year, shaking off a surprise contraction in the Canadian economy in the second quarter.

The Canadian dollar is hovering near its highest level in about three weeks and is above its 200-day moving average at C$1.2525 per dollar.

The main event of the week falls on Thursday when the European Central Bank meets, with the focus on a potential cut to the pace of bond purchases, particularly following some hawkish comments from policymakers last week.

A majority of economists polled by Reuters expect a slowdown in ECB bond purchases, especially after data last week showed inflation surging to a 10-year high. But an overnight rally in stocks and a dip in the euro suggests traders may not be betting on such a scenario.

After touching a one-month high in the wake of disappointing US labour data on Friday, the euro has been unable to hold above $1.19 and last bought $1.1881. The pan-European STOXX 600 index is within a whisker of a record high.

Elsewhere the Japanese yen was firm at 109.76 per dollar and sterling was steady at $1.3848. The New Zealand dollar edged 0.3% higher as the country appears to be containing a coronavirus outbreak and swaps markets are pricing in nearly 100 basis points of policy tightening by May.

Looming over the market and the central bank meetings this week is the stance of the US Federal Reserve, which has flagged asset purchase tapering before year’s end but has said it depends on labour markets which are suddenly looking wobbly.

Friday’s payrolls figures, which showed 235,000 jobs created last month against economists’ expectations of 728,000 were enough to sink chances of a tapering announcement this month, said NatWest’s head strategist John Briggs in a note – but it won’t be clear for another month how long the delay may be.

“It does not necessarily derail our current timeline of a November announcement for December start,” Briggs added said. “The next payroll report on October 8th now looms very large as the main event in considering the timing of tapering.”

In cryptocurrencies, bitcoin held above $50,0000 at $52,497 and smaller rival ether traded little changed at $3, 897 after topping $4,000 last week for the first time since mid-May.



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Bank stocks gain over 2% as Nifty crosses 16,900, BFSI News, ET BFSI

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Indian benchmark indices started the week on a positive note, hitting fresh record highs of 16,931. Traders took encouragement as foreign direct investment (FDI) into the country rises. Asian shares perked up and the dollar fell to a two-week low, today after the US Federal Reserve chairman’s speech.

Benchmark indices gained over 1% and closed at fresh record highs amid positive global cues. At close, the Sensex was up 1.36% at 56,889 and the Nifty was up 1.35% at 16,931.

The Nifty Bank Index ended 2.02% at 36,347. Amongst the top gainers were Axis Bank at Rs 784 adding 4.21% followed by RBL Bank at Rs 169 (4.02%), Bandhan Bank at Rs 285 (3.55%), SBI at Rs 422 (2.49%), ICICI Bank at Rs 713 (1.99%), PNB at Rs 36 (1.66%). All major indices ended in the green.

Nifty Financial Services ended higher at 17,843 adding over 1.85%. Amongst the biggest gainers were Chola Invest. at Rs 548 adding 4.46% followed by Indiabulls Hsg at Rs 227 (3.61%), Bajaj Finance at Rs 7,165 (2.86%), Power Finance at Rs 129 (2.77%), Bajaj Finserv at Rs 16,560 (2.25%).

Buzzing stocks

Axis Bank share price gained over 2% as the private lender began issuing debt securities under a Rs 35,000-crore debt raise plan.

The bank said on August 30 it started issuing securities under the debt-raise plan announced earlier this year. The private sector lender’s board had in April approved a capital-raise proposal of up to Rs 35,000 crore by issuing various debt instruments in Indian or foreign currency in domestic/overseas markets in one or more tranches.

Other key takeaways

Q1FY22 GDP prints likely to be released on August 31

India’s April-June quarter (Q1) GDP numbers are likely to show a significant surge owing to the lower base of last year’s first quarter and a rebound in consumer spending post the second wave of COVID-19.

Experts believe that even though May had seen a slowdown due to the lockdowns, there was a sharp recovery in June and that the economic impact of the second wave has been much more muted than the first wave . According to a Reuters poll, the country’s Q1FY22 GDP growth might have touched a new record.

SBI research report Ecowrap suggests that the country’s Q1FY22 GDP is expected to grow at around 18.5 per cent. However, it is lower than the Reserve Bank of India’s GDP growth projection of 21.4 per cent for the June quarter.

Bank of India extends term of P R Rajaqopal as executive director

The company has extended the term of office P R Rajagopal, Execurive Director of Bank for a period of two years beyond his currently notified term which expires on 28.02.2022, or until further orders, whichever is earlier. Bank of India shares rose 0.97% to Rs 68.00.

FPIs net buyers invest Rs 986 cr in equities in August

Foreign portfolio investors (FPIs) pumped in a net of just Rs 986 crore in Indian equities during August, as cautiousness continued to persist among overseas investors.

According to data from depositories, FPIs bought equities worth Rs 986 crore and invested Rs 13,494 crore in the debt segment during August 2-27. This translated into a total net investment of Rs 14,480 crore.

Gold prices continue to shine

Gold prices rose from a low of USD 1,785.20 on Friday and continued their upward trend on Monday, reaching a high of USD 1826.3 in the early morning session. Gold prices are expected to rise due to a drop in the dollar index and Fed Chair Powell’s dovish tone.

Gold prices are likely to continue solid when trading above the 20-day EMA’s important support level of USD 1797.56, but they may confront significant resistance between USD 1834- USD 1850.

Dollar hit a fresh two-week low

In overnight trade on Wall Street, US stocks surged as US Treasury yields fell on Friday after Federal Reserve Chair Jerome Powell indicated the US central bank could begin scaling back its bond buying programme by year-end but did not give a firm timeline. The Dow Jones Industrial Average rose 0.69%, the S&P500 index gained 0.88% and the Nasdaq Composite added 1.23%.

Held back by the message from the US Federal Reserve chief that there is no hurry to dial back massive stimulus, the dollar hit a fresh two-week low at 92.595 before steadying around 92.66, still a touch lower on Monday.



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RBI more convinced about transient inflation than others, BFSI News, ET BFSI

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With the US Federal Reserve and the Bank of England hinting at normalisation, factoring in a more enduring nature of the ‘transient’ high inflation, RBI’s statement appears more dovish in comparison. If indeed the duration of high inflation is longer, RBI may need to re-think its GSAP purchases and start normalising the extant liquidity deluge, which has risen to 5.4 per cent of banks deposits.

Possibly, the enlargement of variable rate reverse repo (VRRR) auctions is a precursor to such a scenario. The litmus test for how transient the inflation spike is lies in the resolution of global supply chain issues, particularly in developed economies, which explains a significant part of high prevailing inflation.

‘Inert’ growth weighs: RBI’s policy announcement on Friday, while keeping policy rates unchanged (reverse repo rate at 3.35 per cent and repo rate at 4 per cent), remains weighed by growth-revival imperatives, which are still ‘nascent and hesitant’ in the context of the impact of Covid Wave 2 as well as potential future waves. The demand condition is seen as inert despite normalisation from the impact of Wave 2 and improved 12-month-forward consumer sentiment.

While corporate performance has been good over the past 12 months, investment demand is anaemic. Pricing power in the manufacturing sector is feeble amid rising raw material costs and rising global commodity prices are a risk to growth outlook.

Pre-emptive action can kill the nascent revival: Given growth concerns, RBI has chosen to look through the recent spike in headline CPI inflation (reached 6.3 per cent in June 2021) as it is seen as transient, driven by supply sided factors, elevate domestic fuel taxes, elevated logistics costs, and high global commodity prices. Initiating pre-emptive normalisation of the ultra-easy monetary policy stance based in near-term spikes in inflation could “kill the nascent and hesitant” growth revival.

RBI scales up inflation projection even as growth to in 2HFY22: Overall, RBI has retained real GDP growth projection for FY22 at 9.5 per cent, based on its earlier scaled-down expectation and largely driven by a favourable base effect. The terminal quarter growth is being seen at 6.1 per cent, in Q4FY22, declining from 21.4 per cent in Q1.

The inflation trajectory has been scaled up to an average of 5.7 per cent for FY22, up 70bp from earlier. Importantly, the terminal quarter inflation is being seen higher at 5.9 per cent, accompanying growth deceleration, reflecting the impact of cost-led inflation on growth. The 4 per cent inflation target is now meant to be achieved over 2-3 years.

Easy financial condition the top priority: Thus, RBI’s stance to sustaining its monetary accommodation reflects its prioritisation of comfortable financial and liquidity conditions. Despite the higher projected inflation, central banks have allowed the banking system’s excess liquidity to remain extremely high. The LAF balance has increased further to Rs 8.5 lakh crore, or 5.4 per cent of bank deposits (Aug 4, 2021), up from the daily average of Rs 5.7 lakh crore in June, 2021. The GSAP purchase of G-sec by RBI is slated to continue (Rs 25,000 crore each on Aug 12 and 24, 2021). The only visible change is the progressive expansion of fortnightly auctions of the variable reverse repo rate (VRRR), rising to Rs 4 lakh crore by end-Sept 2021.

Liquidity support extended: Unlike earlier statements, no additional regulatory measures were announced this time. In light of the impact of Covid Wave 2, liquidity support under the TLTRO window has been extended until Dec 31, 2021. Likewise, the liquidity access potential for banks by dipping into SLR holdings of the G-Sec has also been extended. The resolution framework for stressed accounts that provides resolution based on identified financial performance until March 2022 has been extended to October, 2022. Thus, the liquidity support as an essential tool to ensure systemic financial stability is also maintained.

RBI more dovish than others: RBI’s “whatever it takes” stance crucially hinges on its assumption that the inflation spike will be transient, aligning the views of other central banks including the US Fed and UK’s BoE. Even so, the UK’s BoE has scaled up its inflation forecast by a huge 150bp to 4 per cent by end-2021, which implies that the transitory phase of high inflation will be longer than previously imagined.

Hence, “some modest tightening of monetary policy is likely to be necessary” over the next 2 years to keep inflation under control, as per the BoE. A similar view was expressed earlier by US Fed chairman Jerome Powell. Thus, with the US Fed and BoK indicating QE tapering, RBI’s stance of continuing with GSAP is more dovish. If indeed the duration of high inflation is longer, the RBI may need to think about reducing GSAP purchases and start normalising the liquidity deluge; the distortion created that it is creating in short-term money market rates is cannibalizing bank loan demand Possibly, the enlarged of VRRR auction of Rs 4 lakh crore is a precursor to lower GSAP.



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