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Macroscope: An assessment of Open Market Operations by RBI

Macroscope: An assessment of Open Market Operations by RBI

What is open market operation (OMO)?

Open market operation is the sale and purchase of government securities and T-bills by Reserve Bank of India. The objective of OMO is to regulate the money supply in the economy and minimise the impact on the interest rate and inflation

When does RBI come up with open market operations?

When RBI wants to inject the liquidity in the system or increase the money supply, it purchases the government securities from the market and sells government securities when it wants to suck out the liquidity from the market.

OMO Announcement – August 2020

What is the latest Open Market Operation (OMO) announcement?

RBI has decided to conduct simultaneous purchase and sale of government securities under OMO for an aggregate amount of INR.20,000 Crores in two tranches of INR.10,000 crores each.
The auctions will be conducted on August 27,2020 and September 03,2020.

Details of OMOs are as follows:

1. The RBI will purchase following securities through Open Market Operation:

Table

2. The RBI will simultaneously sell following securities through Open Market Operation:

table 2

Let us understand the reason:

1. Long term G-sec yields hardened by ~20-25 bps in last week

MPC has signal led its concern in its stance by resolving to ensure that inflation remains within the target going forward. MPC also believes that the available space for policy space should now be used prudent. With no further rate cuts hope till next MPC meet in October 2020, traders turned bearish on G-sec and resulted in lowering demand for sovereign papers at time when both central and state governments are borrowing large sums.

This move by RBI will help ease the pressure on long term yields.

Table 3

2. Short end rates have fallen, but long -end sticky

The spread between the 10Y and 3-month G-sec has widened to more than 250bps to a ten-year high and hence RBI’s move of buying long term paper will reduce the spread henceforth.

Table 4

Investor Takeaway

A benign global monetary cycle, weak growth and rising inflation may not give the RBI more room to cut rates in near term. We expect RBI to come up with such bold measures henceforth to manage liquidity and evolving market conditions. It will take measures as appropriate to ensure the orderly functioning of financial markets.

Click here If you want to read the complete RBI press release.

 

Macroscope: Assessment of CPI-based inflation for the month July 2020

CPI based inflation for month July 2020

What is Consumer Price Index (CPI) Inflation?

The CPI Inflation is a macroeconomic indicator of inflation, tracking the change in retail prices of goods and services which households purchase for their daily consumption.

Helping ascertain the country’s economic health, central banks actively design monetary policies to keep inflation under control.
India’s target inflation range is 4 (+/-2) %.

Its weighted components are as follows:

Data table

How to Calculate & read the CPI inflation data?

CPI Inflation is calculated as a weighted average of the prices of commodities.
Mathematically, it can be written as: (Price of basket in current period / Price of basket in base period) x 100
Currently, 2012 is used as base year for inflation calculation and reading purposes.

What does CPI Inflation data mean for Financial Markets?

It serves as an indicator of purchasing power of a nation’s currency, and shines light on the broader demand-supply situation in said country. It is also a good parameter to evaluate the invest potential of a country by foreign and domestic investors alike.

CPI Inflation Reading – July 2020

What is the latest reading?

India’s retail inflation exceeds MPC Target For 4th month in a row, rising to 6.93% in July from 6.23% in June.

Inflation 2020

CPI inflation july 2020

It may not be appropriate to compare the CPI inflation in the post pandemic months with the CPI for months preceding the COVID 19 pandemic. Hence not comparing with pre-pandemic numbers.

Investor Takeaway

At over 6%, inflation remains just above the MPC’s tolerance band of 4 (+/-2) %, creating a stagflation-like scenario where inflation is high despite a collapse in growth (GDP estimates point towards contraction).

The CPI print is along expected lines and justifies in retrospect the RBI’s decision to take a pause in the rate reduction cycle. Clearly, supply chain issues have been feeding through the food prices, especially vegetables and partly from higher fuel prices. Supporting the system with tools like liquidity measures and restructuring facility, will propel economic drive in coming times.

As virus cases continue rising impeding opening of economies, we expect supply challenges to sustain over the short-term, with central bank vouching for rate-cuts only after effective transmission of previous cuts and outcome of other liquidity and other similar measures. Hence, it is likely to remain on pause on the October meet and consider rate-cuts in the December meeting.

Click here If you want to read the complete CPI Inflation press release.

Macroscope: RBI Monetary Policy Update Aug’20

RBI Monetary policy

MPC Recap till date

MPC Recap till date

MPC Reading – July 2020

What is the latest reading?

MPC Reading – July 2020

Growth & inflation outlook projection:

Growth: For the first half of the year, RBI expects GDP growth to be contraction zone and real GDP growth to be negative for the year 2020-21. This is on the back of negative consumer confidence in July, weak external demand, and contraction in global trade.

Inflation: Food inflation has been elevated since the pandemic outbreak. Headline inflation is expected to continue at elevate levels through Q2FY2020-21. Supply chain disruptions continue as re-clamping of lockdown in a fragmented manner continues to add pressure. Inflationary pressure also evident across segments.

Other Highlight:

Liquidity reported as essential for effective transmission of rate cuts. Incremental focus on liquidity support for financial markets, improved credit flow, digital payments and leveraging technology. Liquidity measures include INR 10KCr. Liquidity to NABARD & NHB, provisioning to allow stressed MSMEs to restructure debt, Gold loan LTV enhanced to 90% of value

Key takeaways:

As signs of revival defer and the pandemic is yet to taper significantly, the Central Bank may want to have enough rate headroom as dry powder and err on the side of caution. Improved statistics on containment efforts of the pandemic may nudge the Real GDP situation into the positive trajectory soon. RBI is being judicious with the use of monetary tools which seems like a good idea as world economies continue to stare into the fog.

 

Macroscope: Manufacturing PMI Update August 2020

PMI

What is Manufacturing Purchasing Manager’s Index (PMI)?

The Manufacturing PMI is a performance measurement of the manufacturing & services sector, derived from a 500 manufacturing companies’ survey. It aids in gauging business activity and confidence levels.

Its weighted components are as follows:

details PMI

It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

How to read the PMI data?

– >50 figures indicate an expansion of the manufacturing sector compared to the previous month.
– <50 indicates a contraction.
– =50 indicates no change

What does PMI data mean for Financial Markets?

It serves as an indicator of corporate earnings, thereby, influencing equity & debt investors, alike. It is also a good parameter to compare attractiveness of an economy vis-a-vis another competing economy.

PMI Reading – July 2020

What is the latest reading?

The PMI figure in July 2020 stands at 46, compared with 47.2 in June

PMI data

PMI

Virus cases still rising and even the lockdown across multiple states, which indicates that the long road back to normality for the manufacturing sector.

 

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