Gradual change in Policy Pivot, receding inflation pressure and easing yields
Globally Nov’22 saw marginal decline in monthly inflation print, declining fuel and food prices, easing US treasury yields and depreciation of dollar index - thereby reducing pressure on currency (both advanced and emerging economies). With many economies across globe (advanced and emerging) closer to terminal rate in current rate hike cycle, many central banks have/ are likely to pivot to slower increase in policy rate in near future.
In India, month saw in line with consensus economic growth, decline in inflation, elevated trade deficit print, robust fiscal print, buoyant FPI flows and importantly rupee appreciation.
India’s economic growth slowed down to 6.3%y/y in 2Q FY23, after accelerating robustly to 13.5% y/y in 1Q FY23. This was primarily due to unfavourable base effect. The latest print came in line with consensus & RBI’s projections – driven mainly by private consumption and capex. Net exports and govt revenue spending were the key laggards. From supply side, Headline GVA grew at 5.61%y/y from 12.75%y/y in previous quarter driven mainly by agriculture, construction and services (read: trade, hotels, transport and communication). Indian economy is projected to grow at 4.6%y/y in 2H (Oct-Mar 2022-23) on adverse base effect, rising global headwinds and tightening domestic financial conditions.
Oct’22 Headline Inflation eased to 6.77% y/y (Previous: 7.41%y/y). Higher sequential demand for food prices (festive season demand, lower supplies due to rains), clothing, housing and fuel prices kept headline print above RBI’s comfort limit. That said, favourable base effect helped in bringing down the headline print. Market core eased to 5.97% (Previous: 6.07%) aided by base effect. Average YTD FY23 inflation print stood elevated at 7.1%y/y (FY22: 5.51% y/y).
Apr-Oct 2022 Tax collections continued to remain robust, while expenditure growth has accelerated from Sept’22 onwards - driven by both revenue and capex. As a result, despite recent pick-up in expenditure, fiscal deficit remained ~46% of BE (pre-pandemic trend: 84%). Nov’22 GST data indicates that GST collections continued to remain buoyant.
Trade deficit has worsened since start of the fiscal year, driven by sharp moderation in exports (complete ban, export duties, export quota) and jump in imports due to strong domestic demand & high acceleration in crude prices. Although recent months have seen slowdown in imports (aided by lower commodity prices), trade deficit continued to remain elevated at ~US$26-27 bn (Jul through Oct) on continued deceleration in exports. With Apr-Oct trade print available and based on emerging trends, FY23 CAD print is expected to be in range of 3.5%-3.7% of GDP (much above RBI’s comfort levels of 2.5%).
After witnessing marginal outflows in Sep-Oct’22, net FPI saw a robust flow of US$4 bn in November. While RBI has been intervening regularly in forex markets, impact of adverse external imbalances was clearly evident on exchange rate movement over last couple of months. After continuous depreciating since start of calendar year, Rupee appreciated marginal in Nov’22 reflecting depreciation in dollar index. Average Rupee was ~81.81 during the month (Oct: 82.34, Sep: 80.23, Avg July-Aug: 79.55-79.59, Jun: 78.07, May: 77.27, Mar-Apr: 76.09- 76.26, Jan-Feb: 74.44 -95). YTD CY2022 rupee depreciated ~ 9.8% against dollar.
Yield Levels & Spreads:
Yields eased during the month tracking crude prices, dollar depreciation, lower US monthly inflation print and on expectations of change in pivot for lower increase in policy rate (US Federal Reserve, UK BoE and Euro area ECB). While the G-sec yield rose post Fed policy meeting in early November, it rallied soon and were range-bound throughout the month - on downward bias in crude price and pressure on dollar. From trading in range of 7.37-7.52% in Oct, 10-year G-sec started the month at 7.4%, moved up to 7.48% post Fed policy, but eased to 7.30 lvls by 11th Nov , and stayed around those levels thereafter. It closed the month at 7.28 levels (Oct’22 end : 7.45%, Sep end : 7.39%, Aug:7.18%, July:7.32%, June:7.45%, May: 7.42%, Apr: 7.12%, Mar: 6.84%).
10 Term premia (10 yr over 365 days) eased further during the month to average ~46 bps on account of longer end of yield curve easing faster than the shorter end (Oct’22 : 58 bps, Sep’22: 77 bps, Aug’22: 104 bps, Jul’22: 120 bps, Jun’22: 133 bps, May’22: 166 bps, Nov 2021- Apr 2022: 222- 238 bps).
Like G-sec, 10 yr SDL yields also eased and remained range-bound throughout the month. It closed the month at 7.58% (Oct: 7.76%, Aug-Sep: 7.52-7.57%, May through Jul :7.70-7.78%, Apr: 7.27%, Mar: 7.18%). Nov’22 SDL primary supply stood at Rs.56,899 cr (Oct 22: 70,450 cr, May-Sep’22 monthly average ~50,000 cr, Apr 2022: 10,000 cr). The average spread between 10 yr SDL over G-sec stood at 33 bps during the month (Oct: 29 bps, Sep: 28 bps, Aug: 35 bps, May-Jul: 29-33 bps, Apr: 21 bps).
Taking cues from G-sec & SDLs, AAA bonds yield eased and remained range-bound during the month. 10 yr AAA PSU started the month at 7.74%, reached 7.60% by mid-month, remained range-bound to close the month at 7.58% (Oct end: 7.76%, Sep end: 7.76%, Aug end: 7.51%, Jul end: 7.7%, Jun end: 7.89%, May end: 7.77%, Apr end: 7.35%).
Global inflation eased marginally in October, with pick-up in advanced economies and moderation in emerging economies. While Oct print indicated better than expected decline in inflation, Euro area, UK and Japan’s print came much higher. Global food and fuel prices continued to decline. That said, with inflation expected to remain above global central bankers’ comfort level in coming months, the Central Bankers across globe are expected to hike further and maintain the restrictive policy rate regime going into CY2023 - to tame inflation expectations.
Persistently strong inflation has forced central banks globally to front-load and exercise larger hikes and withdraw surplus liquidity at faster pace. While that trend continued into Nov’22, with most of hike of current cycle already done, general perception is that most central bankers are at the fag end of rate hike cycle. Further, central banks from US Fed to ECB have already indicated to go slow on policy tightening – to assess the impact of previous rate hike given the time lag required for monetary transmission on real economy. With most of rate hikes in current cycle already done, US Fed policy statement and policy-makers speeches thereafter have clearly signaled to reduce the speed of rate increase in coming meetings - depending on evolving data. With Inflation under control and rising growth concerns, China continued to remain dovish.
After sharp rise in yields in Sep-Oct on hawkish pivot, US treasury yields eased from their record high levels. The US 10 Yr Treasury bond yield started the month at 4.07%, rose sharply post policy to cross 4.22% within first week of the month, only to ease sharply and remained ~average 3.76 lvls in second half of the month - driven down mainly by lower than consensus inflation print and on lower rate hike pivot of Fed. It closed the month at 3.68%. (Oct end: 4.10%, Sep end: 3.83%, Aug end: 3.15, July end: 2.67%, June end: 2.98%, May end: 2.85%, Apr end: 2.89%, Mar end: 2.32%, Feb end: 1.83%, Jan 2022 end: 1.79%).
Reflecting this sharp decline in yields, Dollar Index depreciated by 3.5% m/m after rising sharply in Sep-Oct. It closed the month at 108.05 (Oct end: 111.53, Sept end: 112.11) YTD Dollar index has rose by ~10.8%.
- While the October’22 inflation print was higher than expected on festive season demand and heavy rains, data in November’22 indicates easing of food prices. Gong forward, we expect inflation to come down on back of seasonality (typically veggies, fruits and cereals prices come down during winter) and favourable base effect.
- Yet, with inflation expected to remain above 6% for most part of 2H, RBI will continue to remain vigilant. That said, with commodity prices down, food prices expected to moderate on seasonality, changing global central bankers’ pivot, decline in US treasury and dollar index thereby reducing pressure on rupee may provide RBI cushion to go slow. Given the growth resilience and external balance concerns, we expect RBI to be nimble footed
- On fiscal front, strong revenues receipts in Apr-Oct FY23 and robust nominal growth will likely help in achieving FY23 fiscal deficit target, despite rise in additional expenditure on various items (from subsidy to MNREGA).
RBI, Finance Ministry, Bloomberg, CEIC, CCIL, Crisil, ICRA, BoE, US Federal Reserve, ECB
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