Starting with India, in a significantly positive step the government addressed the long standing problem of PSU bank recapitalization. The sum involved of Rs. 2.11 Lakh crore is significant and should impact growth positively. The move will also enable RBI to cut rates in December policy meeting subject to October Inflation printing at comfortable levels similar to last print. RBI had repeatedly said that monetary support alone could not help a pickup in lending unless structural steps are taken and therefore now it would have one argument less to not cut rates. All in all the move is equity market positive. The issued bonds are unlikely to be SLR status although the same is not confirmed and it does not increase the accounting fiscal deficit of the government. Public debt does go up which is a milder concern as compared to the positives. Bond yields therefore should only gradually inch up, they have not shown signs of panic sell off today morning (Yesterday India 10Y was at 6.795 and today it is at 6.804%).
The above announcement immediately took USDINR from 65.05 to 65.20 levels in the offshore market. But given the medium term growth positive outlook plus the fact that bonds have not shown a runaway in yields, further worry for INR seems unwarranted. Given the positive equity impact of the announcement, and an increased rate cut chance, the INR carry trade environment is ripe again.
USDINR 1m NDF is trading 1.5p right showing signs of concerns post the announcement. EM currencies have appreciated since yesterday while Asian equities are also in the green. Market participants would wait to see the impact across asset classes and I would expect as the announcement seeps in we could see some INR appreciation. CMP 65.14, Range 65.22-65.00.
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