All about the markets and where we stand

Transcription

1 All about the markets and where we stand Contact: Madan Sabnavis Chief Economist Dr. Rucha Ranadive Economist Sushant Hede Associate Economist Purnima Nair Associate Economist Mradul Mishra (Media Contact) September 11, 2018 I Economics In recent times there has been increased volatility in the financial markets especially in the forex segment. The fluctuations in the currency markets tend to have repercussions on the money market as expectations get built on possible interest rate action by the RBI. The stock market too reacts to such developments though the impact may be limited to specific trading sessions. The question to be posed is whether or not the Indian markets, especially currency, have been affected more by a global phenomenon of dollar strengthening due to extraneous reasons or on account of weaker fundamentals. The global economy is being driven by headwinds in the form of trade wars with China, rising crude oil prices on account of the sanctions on Iran and the more recent action of the US on Turkey. This is also happening at a time when the US economy is strengthening and the Fed is poised to increase interest rates at least two more times this calendar year. India had accumulated substantial forex reserves of around $ 425 by March However after the rupee has come under pressure after May, there has been drawdown of reserves to support the currency. Widening of the CAD in Q1-FY19 on account of higher trade deficit mainly due to rising crude oil prices has affected the net balance of payments. There has also been sale of dollars by the RBI. However, the level of reserves at around $ 400 bn as of end-august looks fairly satisfactory today with import cover of ~ 9 months. In the foregoing study we look at: - Depreciation of the rupee vis-à-vis the dollar relative to other currencies. This will give an idea of whether the decline has been driven more by external factors or fundamentals. Disclaimer: This report is prepared by the Economics Division of CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report - Movement in GSec yields. Of late with the rupee depreciating at a faster rate, there are expectations that the RBI will increase rates further in the October policy which has caused the 10-years GSec yield to go to the % range. - Stock market movements have generally been driven by a variety of factors and a weaker rupee or higher interest rate regime may not have a long lasting impact. In this context, these movements are compared across other major indices.

2 Economics I Markets Scenario Currency market: Exchange Rates against US dollar The graph below indicates the percentage change in the exchange rate against US dollar in September 2018 of select developed and emerging market economies over: - April 2018 as the trade wars and issues with Iran started subsequently. The rupee was fairly stable between January and April June 2018 which was after the Turkish Elections There has been depreciation across select currencies against the US dollar since the beginning of the financial year Considering the percentage change over April 18, Argentine Peso depreciated the most by 89% due to the country resorting to IMF for the financial help, followed by Turkish Lira (62%), South African Rand (27%). Korean Won, Singapore Dollar, Thai Baht and Taiwan Dollar also depreciated though at a lower rate. Exhibit 1: Exchange Rate per USD in Sept'18 (% change of monthly average exchange rate) EUR GBP JPY ARS BRL CLP CNY HKD INR IDR MYR MXN PHP RUB SGD ZAR KRW TWD THB TRY Over Apr'18 Over Jun'18 Note: (-) Appreciation / (+) depreciation Source: Pacific exchange rate service (ZAR: South Africa CLP: Chile Peso ARS Argentina CNY China IDR Indonesia MYR Malaysia SGD Singapore RUB Russia TWD Taiwan THB Thailand TRY Turkey) Mexican Peso, which has witnessed depreciation by 5% over April 18, has appreciated by 5% over June 18 in September 18 due to political stability in the country. Russian Rubble has also declined by 13% - 10% in September 18 on account of the concerns over US sanctions on the country. How has Rupee faired? The question arises, is the depreciation in the rupee on account of the domestic factors or global factor are dominating the fall in the rupee? During this period Indian rupee has depreciated by 9.3% over April 18 and by 5.9% over June 18. This is in line with the depreciation registered by other emerging markets like Chinese Yuan, Indonesian Rupiah, and Russian Ruble. If we consider the changes in the Rupee since the Turkish crisis, then on the weekly basis, the rupee has depreciated by nearly 5% in the first week of Sept 18 compared with last week of June 18. This is on par with a depreciation 2

3 Economics I Markets Scenario registered by other emerging countries like Russian Rubble (9%) Brazil (8%), Chilean Peso (6%) Chinese Yuan (4%), New Zealand (4%), Indonesian Rupiah (5%) among others. Even on daily basis, the Rupee has depreciated by nearly 4% as on 7 th Sept 18, compared with 1 st July 18. The emerging picture is that the rupee has depreciated by higher than the median level when compared with April. In the list of 20 countries, the rank is 13 with UK and China being closer to the rupee depreciation. The stronger dollar does appear to be the dominant factor when this data is juxtaposed with the forex reserves situation which has been stable at around $ 400 bn. Depreciation: Avg Sep- Avg April (%) Country Depreciation Hong Kong 0.0 Philippines 3.1 Japan 3.4 Singapore 4.6 Thailand 4.8 Taiwan 4.8 S Korea 5.0 Mexico 5.2 Euro 5.9 Malaysia 6.6 Indonesia 7.8 China 8.6 UK 9.0 India 9.3 Russia 12.9 Chile 14.4 Brazil 21.1 South Africa 26.5 Turkey 61.7 Argentina 88.5 Interest rates The 10-year benchmark GSec yields scaled a 4-year high and closed at 8.16% on 10 September amid varied concerns like rising dollar, higher crude oil prices and escalating global trade tensions. The yields have risen from a weekly average of 7.23% at the beginning of the year to the recent close of 8.16%. The yields rose sharply from 7.23% at the start of the year to 7.79% immediately prior to RBI s second bi-monthly policy meet. This build-up in yield was anticipation from the investors of a rate hike by the RBI, which was announced by the central bank on 6 June 18. Yields also closed at 7.99% on 7 June, immediately following the RBI meet. However, following the rate hike by RBI of 25 bps, the GSec yields moderated to 7.75% prior to the third bi-monthly monetary policy committee (MPC) meeting. Following RBI s decision to hike the interest rates by 25 bps in its meeting on 3

4 US yields (%) Indian Gsec yields (%) Economics I Markets Scenario Aug 1, the GSec yields have seen a sustained increase till date. Yields crossed the 8% mark in the beginning of September 18 and witnessed a sharp jump of 13 bps on 10 September to close at 8.16%. Exhibit 2 shows the movement of the Indian 10- year GSec yield and the US treasury yields for the ongoing financial year (FY19). The data compiled is of the average weekly yields from April-Aug 18, following which daily yields have been populated for the month of September 18. Exhibit 2: Movement in Indian benchmark 10 year GSec yields and US 10 year treasury yields (%) Apr 6-May 6-Jun 6-Jul 6-Aug 6-Sep 6.40 US Yield Gsec Source: FBIL, Bloomberg, CARE - RBI Monetary policy announcement of rate hike - US Fed announcement of rate hike On a point to point basis, the GSec yield has increased by 93 bps during this period while for the US treasury it has been 15 bps. The paths however have been different. In our case the direction has generally been upwards with moderation witnessed between June and August before increasing. The US rate has been relatively more disconnected in direction during this period with several ups-and-downs. The recent increase in the yields can be attributed to following reasons: In case of the US treasury yields, the rise can be on account of the robust economic performance during the second quarter which has led to the expectations that the US Fed will hike rates in the month of September 18 In case of the Indian G-sec yields, the rise can be attributed to the inflationary concerns on account of an elevated crude oil prices, widening current account deficit and weakness in the Indian rupee. During the current financial year the LIBOR-3 month has ranged between 2.30% to 2.37% without witnessing much fluctuation. GSec yields and Net Liquidity Exhibit 3 juxtaposes the movement in the weekly average 10 year benchmark GSec yields with the net banking liquidity. The net banking liquidity is calculated as the difference between the total repo borrowings (including marginal standing facility) and the total reverse repo transactions. A negative value indicates liquidity surplus while a positive value is liquidity deficit in the banking system. 4

5 10 year Gsec yields (%) Net Liquidity (Rs. lkh crs) Economics I Markets Scenario Exhibit 3: 10 year GSec yields and net liquidity position in the banking system Apr 6-May 6-Jun 6-Jul 6-Aug 6-Sep Gsec Net Liquidity Source: RBI, FBIL, CARE The chart above shows that prior to RBI s second MPC meet, the GSec yields were rising despite the overall banking liquidity surplus. Even with the banking system witnessing an average liquidity surplus of Rs lakh crs during the period 1 Apr to 6 Jun, the weekly average GSec yields rose from 7.23% to 7.91%. There has not been a sustained increase in the GSec yields when the overall banking system witnessed deficit during the entire period under study. The point to note is that for the month of September 18, the GSec yields have continued to witness an increase despite surplus average net liquidity of Rs lakh crs during the month. This chart indicates that the surge in GSec yields in the month of September 18 cannot be attributed to a tight liquidity position. Stock market movement The Sensex reached the 35,000 mark in early May this year. After a subdued week in early June the market index has been rallying upwards on account of a positive view on the state of the economy following the declaration of the Q1 results. Announcements of trade sanctions of the US on Iran and later on Turkey have created a negative view in the global trade scenario. The Sensex grew by 17% from end-of March (32,969) to end-of August (38,723). Sensex and FTSE seem to be moving more smoothly together. The European stock market performed well in response to the speculation of Britain remaining in Europe s Customs Union. The FTSE 100 peaked at 7,887 in mid-may of FY19, which was a ~12% rise over the end-of March 18 level of 7,044. The European market had been largely volatile over June and July owing to the trade tension between US and China. The extraneous factors seem to have driven the market sentiments over the past six months. By August end the FTSE was weighed down by a no deal Brexit, as the FTSE closed at 7,432 end-of-august 18 which is ~4% lower than the end-of-july level of 7,749. The Dow Jones has followed a general trend and has been trading in the range of 24,000-25,800, since March 18. A fall in the US jobless growth led to infusion of positive market sentiment, as the Dow Jones recorded a ~9% rise over the last six months, from 23,848 end-of March 18 to 25,987 end-of August 18. 5

6 Economics I Markets Scenario Exhibit 4: Sensex, Dow Jones and FTSE (end-of March to end-of August 18) 40,000 Concluding remarks 38,000 7,877 7,900 38,723 36,000 7,800 7,700 34,000 32,969 7,600 32,000 7,500 30,000 7,432 7,400 28,000 7,300 26,000 23,848 7,200 24,000 25,987 7,100 7,044 22,000 7, Source: Bloomberg, BSE Dow Sensex FTSE It thus appears that the global factors have had a more important role to play for the depreciation of the rupee rather than the domestic factors like widening current account deficit, foreign investment outflows, rising inflation due to elevated crude oil prices. 2. The benchmark GSec yields have been increasing on account of expectations of RBI turning more hawkish following the fall in the rupee besides rising inflation 3. With regard to the domestic equity markets while the rupee depreciation may have slowed the momentum at time, in general the reaction of the markets rather appears to be muted. 8,000 CORPORATE OFFICE: CARE RATINGS LIMITED (Formerly known as CREDIT ANALYSIS & RESEARCH LIMITED) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai CIN: L67190MH1993PLC Tel: I Fax: care@careratings.com I Website: Follow us on /company/care Ratings /company/care Ratings 6