India #RBI formally launches #QE:

▪️ Named 'Government Securities Acquisition Programme', G-SAP 1.0
▪️ Commits to specific amt of G-Sec purchases (INR 1.0 trn in Q1 FY2021-22)
▪️ At annualized INR 4 trn, that is ~7% of RBI Balance Sheet BS (Fed's $1.44 trn QE => ~19% BS)

▪️ While RBI prefers 10yr yield to be ard 6.0%, formal Yield Curve Control YCC targets specific yld for specific tenor (BOJ Japan & RBA Australia) => unknown amt of bond purchase to meet yld target
▪️ RBI's G-SAP more QE (pre-announced amt) than YCC

G-SAP v/s OMO?
▪️ Practically not much diff but RBI generally does not commit to purchase amt under OMO
▪️ OMO more for liquidity mgmt => inject as well as absorb liquidity
▪️ QE purchase necessarily injects liquidity; targets backend ylds => BS expansion => Reserve Money ⬆️

▪️ Since pre-COVID, RBI's BS has expanded 28% to ~INR 57 trn
▪️ But 63% of that came from increase in Foreign Currency Assets (FCA) (FX Intervention) and not only from OMOs => RBI's G-Sec purchase constituted only 28% of that expansion

@Macro_Maniac_ @SergiLanauIIF
▪️ Consequently, on liability side, Currency in Circulation⬆️by ~24%

Since pre-COVID, Feb'20:
▪️ Reserve Money +17.5% (currency demand)
▪️ Broad Money M3 +14.75%
▪️ Bank Credit +7.5% (lending)

For perspective,
RBI's BS Size = 26% of GDP
US Fed's BS Size = 35% of GDP

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More from @VaradMarkets

16 Feb
Trading #US $Dollar: Basic Macro Construct

Two key Dollar drivers:

#1 Growth/Inflation/Risk-sentiment (y-axis)=> Inflation Breakeven (BE) (/ Equities)

#2 Nominal Interest Rates (x-axis) => 10yr US Treasury Yield


Q1: Risk-On-Lower Real Rates => Short USD
Q1: Risk-On-Higher Real Rates => Long USD
Q2: Goldilocks => Risk-On-Lower Nominal/Real => Short USD
Q3: Risk Off => Lower Rates => Equity Sell off/Bond Rally => Long USD
Q4: Risk Off => Equity & Bond Sell off => Long USD

Performance since COVID, Mar'20
- Higher BE/Risk On + Higher Nominals => 31% of all observations
- Good success (85%) on Short USD under lower Real (18.4% of obs)
- But higher Real under Risk On only 20% success on Long USD
- So despite higher Real, USD lower on Risk On
Read 10 tweets
6 Feb
#DiveIn: #Inflation Breakevens (BE)

Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:

BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)

BE = inflation level that makes investor indifferent b/w buying UST or TIPS
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI

10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%

Breakevens (from TIPS) actually do not capture pure inflation expectations

Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP

TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP

BE = N – R = IE + IRP – LP <> IE

Read 8 tweets

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