Do it yourself

The first half of the financial year FY26 has been good for financial and commodity markets in general. Despite elevated geopolitical concerns, renewed trade war, slowing growth in major economies and emerging deflationary pressures, stock market, crypto assets, and precious metals, and industrial metals performed rather well. Energy and soft commodity prices were lower, indicating good price control. The global central bankers accordingly remained on the easing path. India however was an outlier in the global context. Indian equities, currency and bond markets were one of the worst performers globally. South Koren equities were the best performing equities in 1HFY26. Chinese and German equities were other notable outperformers. Equity indices of the US, Japan, and the UK also recorded strong gains. The most notable feature of global markets was the sharp rally in precious metal. The central bankers across emerging markets accelerated their gold accumulation, in view of the geopolitica...

Continuing from yesterday… Mr. Bond no longer a superstar Given my view that the yield curve is no longer a strong leading indicator, I prefer to use a mix of indicators to assess the likely direction of the markets. Mortgage rates, credit growth, credit terms, repo outstandings and the size of the central bank’s balance sheet are the most prominent ingredients in the mix I like to use. For example, in the context of the US, Mortgage rates are a close pulse on borrowing costs, consumer behavior, and economic health, less abstracted than the yield curve. In the U.S., the 30-year fixed mortgage rate tracks loosely with the 10-year Treasury yield—historically about 1.5 to 2 percentage points higher—but it’s more than just a derivative. It folds in lender risk appetite, housing market dynamics, and Fed policy fallout in a way that hits Main Street directly. Presently, mortgage rates are climbing—30-year fixed is around 6.8%, up from 6.4% in late March, shadowing that recent 10-year ...

It’s almost a year since the Reserve Bank of India shifted the course of its monetary policy stance and embarked on the path of monetary tightening and withdrawal of accommodation to reign in runaway inflation. In the course of its journey in the past one year, RBI reversed the entire 250bps of rate cuts made during 2019-2020.  Besides hiking the policy repo rate, RBI also enforced correction in banking system liquidity to check the demand side pressures on inflation. The banking system liquidity that was running in excess of rupees eight trillion a year ago, has been completely neutralized. Impact of monetary tightening It is very difficult to assess the direct impact of the RBI’s monetary policy action and its consequences. Nonetheless, it is pertinent to note how various sub segments of the economy have moved in the past one year. This movement could have been caused by a variety of factors, RBI tightening being one of them. Inflation The Consumer Price Index Inflation (CPI...

  Largely as expected; capex sustainability core focus (Phillips capital) Budget fared well across categories – prudent fiscal position, steep rise in capex allocations, continued focus on sustainability, Atmanirbhar Bharat, and social upliftment. Capex budgetary allocations have risen sharply in FY24 (up 37% vs. 23% in FY23); including IEBR, growth stands at 32%/10% in FY24/23. Incremental capex allocation in FY24 is highest for railways, roads, infra spending by states, and energy; defence and housing are muted; additional allocation of Rs 550bn has been made towards OMCs and BSNL capital infusion. Sharp drop in food and fertiliser subsidy (Rs 1.6tn) is in the expected lines. MNREGA allocations have also see a sharp decline to Rs 600bn vs. Rs 894bn in FY23RE. Fiscal deficit for FY24/23 is in line with our expectation – at 5.9%/6.4% of GDP; gross/net borrowing expectedly remains elevated at Rs 15.4tn/11.8tn, marginally higher vs. FY23. We expect this to keep yields elevated in the...

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) is scheduled to announce its latest assessment of the economy and its policy stance tomorrow. A large number of market participants are waiting to hear the Fed chairman, with bated breath. I expect a large number of traders in India to stay awake till midnight to hear Mr. Powell, even though they cannot initiate any trade until 9:15AM on Thursday, when the Indian markets open for trading. Therefore, literally speaking, losing sleep to hear the Fed statement is of little consequence. The market consensus is for a 75bps hike in the policy bank rate and an unambiguous hawkish stance unlike the previous statement in July, when the Fed sounded little ambivalent about the future hikes. Some experts are expecting even a steeper 100bps hike and raise in the terminal bank rate target to 4.5% (from previously estimated 3.75-4%) by April 2023. This implies a total of 200bps expected hike between September 2022 and April 20...

The market participants in India must be relaxed after a strong equity market rally in the past 4-5weeks; and stable INR and bond markets. To that extent the RBI has played its part rather well. It has repeatedly reassured the markets about its commitment to the economic growth and stability in the financial markets. Despite turmoil in the global energy and food markets and geopolitical concerns, the RBI managed to contain the volatility in currency and debt market to very moderate levels. With this background in mind, the market participants are obviously complacent to the likely outcome of the meeting of the Monetary Policy Committee of RBI this week. It seems to be a consensus view that the MPC may use some stronger words to express the concerns about rising prices and exacerbated fiscal pressures, but may stop short of hiking policy rates or changing its accommodative policy stance. Given the fragility of the economic recovery and elevated global uncertainty, the last thing RBI w...

 The yields curve in India has been moving higher for past few months, despite the efforts made by the Reserve bank of India to anchor the benchmark yields at lower levels. In past one year, the RBI has used most of the arrows in its quiver to manage the bond yields, apparently with the three targets in view – (a) to help the government fund its fiscal expansion at reasonable rate; (b) to keep the financial markets calm in the times of adversity; and (c) to keep the rate environment supportive of growth. However, last week the RBI appears to have changed the trajectory of its policy by accepting higher coupon (6.10%) for the new benchmark security (6.10GS2031). This move is widely expected to result in India’s yield curve inching little higher, and perhaps flattening a bit. The debt market traders have largely seen the latest move of RBI as the rise in its tolerance for higher yields. Though the governor has maintained that RBI is committed to keep the borrowing cost for the go...