In the US comments from corporate bigwigs about the need and effectiveness of tax cuts brought US yields marginally lower along with USD index. US equities on the other hand continue to price in the valuation gains from the proposed tax cuts. Commentary suggests that Trump’s political effectiveness has increased substantially over the last 1 month and consequently we can expect significant positive surprises on the budget resolution which is to be passed this week and then the tax reforms which might have to wait till December 2017. Overall to a certain extent, let me admit that the Trump trade is back (higher US yields, stronger dollar and higher DM equities).
RBI cannot argue for a rate cut any more with inflation picking up (although expected) and fiscal slippages accelerating (unexpected). What RBI would do is revise growth forecasts lower and sound dovish. An actual rate cut today might not be as useful as compared to a dovish RBI which can help in keeping rates lower across the curve. Broadly these are market expectations also and therefore RBI policy should be a non event, except for the chance of RBI raising a few red flags on growth or fiscal which could become India risk negative.
Latest forward data shows RBI has bought more than USD 61 bn in spot and forward reserves put together in CY 2017. This shows that RBI does not pay heed to the US currency manipulator parameters, or it could also show that RBI would sell USDINR aggressively if there is upside volatility. CY 2017 data would be used for the Apr 2018 report while the report due shortly in Oct 2017 will be basis the data July 2016 to June 2017, where there is no risk of India breaching the limit.
USDINR 1m NDF is trading 7p left which indicates offshore selling. This is surprising given the overall environment for INR and therefore one can assume that this is flow driven. EM currencies have all appreciated since yesterday while Asian equities are in the green. Yesterday Nationalized banks bought the pair aggressively and we can expect the same to continue. CMP 65.35, Range 65.25-65.50.
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