Is the #RBI's #VRRR move policy normalisation? Fridays' note argued that the upward calibration of the variable rate reverse repo (VRRR) was not a sign of normalisation of policy, especially when the Governor said it himself explicitly. The note argued that the VRRR...(1/12)
...calibration was just shifting of monies from one pocket to another, especially when the #callmoney rate is still 22bps below the reverse repo rate. The focus therefore is to bring the call rate closer to the policy rate, when system liquidity is on the rise. One can...(2/12)
...justify the market narrative on three counts. Firstly, the markets saw a surprise dissent against the policy decision (5:1) and noted that it was not unanimous. Secondly, the 60bps upward revision to inflation created a flutter especially when the RBI maintained a...(3/12)
...'transitory' language around inflation. Thirdly given that the VRRR window is a 14-day window unlike the fixed rate reverse repo which is overnight in nature. So, this gives a sense to the markets that the RBI is cordoning off more money/liquidity away from the system...(4/12)
...(or overnight window). While all of these arguments have their valid points of view, the perspective to the VRRR calibration is more likely brought out when one notices that the weighted average call ra-te is currently at 3.13%, a good 22bps below the RBI's reverse...(5/12)
...repo rate. With a muted demand for credit on the ground currently, more money is being deposited by financial institutions with the RBI under the reverse repo window that gives them an interest of 3.35%. The 14-day VRRR window currently only absorbs Rs.2tr of...(6/12)
...liquidity. By increasing this liquidity absorption by the RBI to Rs.4tr by September, the RBI is incentivising the system to shift to the VRRR window where the auction cut-off is around 9-10bps higher than the 3.35% of the reverse repo rate. This move of the RBI...(7/12) after it noticed high bid-cover ratios in VRRR auctions. This means that they noticed significant demand for the VRRR deposits that could not be met due to the Rs.2tr cap. A gradual increase of the current Rs.2tr to Rs.4tr (Rs.2.5tr>Rs.3tr>Rs.3.5tr>Rs.4tr) ensures...(8/12)
...that the RBI would also be giving markets the room to realign rates gradually, closer to the reverse repo rate. In short, the RBI's move is a clear reflection of its discomfort with an increasing amount of money floating around and a move to push rates closer to the...(9/12)
...effective policy rates (here reverse repo). We are still to read the magnitude of India's expected third wave, the confirmation of investment as a driver for growth and importantly the Fed's mind on its ongoing infections curve that would help prolong the RBI's...(10/12)
...accommodative cushion for the economy. Further, the RBI continues to see “…demand-pull pressures remain inert" and "weak and overcast by the pandemic”, with nurturing growth impulses being the "overarching priority". There is one more outside thought to be kept in...(11/12)
...mind. #MrDas' three-year tenure ends Dec'21. While there is no public information on whether the Governor will get a 2Y extension, from the standpoint of policy continuity, the last thing a central bank would want to do is initiate an indication of a policy shift....(12/12)

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More from @arjungn80

11 Aug
China PMI weakness ahead? Following up on the quoted tweet, one zeroes in on #China's #manufacturing #PMI. Key Asian economies have seen weakness on the back of a rise in their #COVID-19 curves and related restrictions on activity. China has been experiencing multiple...(1/4) Image
...issues. The recent policy shock aside, from mid-July, China saw power outages, significant floods, all in provinces housing key manufacturing-hubs. Adding to this, the recent surge in COVID-cases have led to a string of lockdowns/restrictions across 14 provinces. While...(2/4)
...the extreme weather disturbances in July was expected to have dented China's production, the PMI manufacturing numbers were only marginally lower. Focus now shifts on August activity that is now expected to tag its Asian neighbours like Malaysia, Vietnam and...(3/4)
Read 4 tweets
16 Jul
Have faith in the Fed. In his testimony to the Congress/Senate Banking Committee, Powell urged lawmakers to have faith in the Fed's judgement. The Fed Chair reiterated his message that inflation would stay elevated for a few more months before moderating...(1/6)
...and that it would be too risky to tighten policy too early. He said:
“The challenge we’re confronting is how to react to this inflation, which is larger than we had expected or that anybody had expected. To the extent that it is temporary, then it would not...(2/6) appropriate to react to that. But to the extent that it gets longer and longer, we’ll have to continue to revaluate the risks that would affect inflation expectations and would be of longer duration and that’s what we’re monitoring...”.
On the nature of...(3/6)
Read 6 tweets
16 Jul
#Crude down 5% in the last few days. Crude prices have been correcting over the last few days by around 5% from its recent high of $75.4 on Wednesday. This comes on the back of press reports quoting #OPEC+ sources that the #UAE had reached a compromise. UAE's baseline...(1/4)
...output is expected to be increased to 3.65mbpd from the current 3.17mmbpd. This is broadly in line with recent market expectations. This eases the markets' read of a tight supply situation and helps soften the demand-supply balance, especially given the...(2/4)
...expectation of a demand pickup in H2 of 2021. Further on the Iranian wildcard we had written about in an earlier tweet, Iran is not expected to return to the negotiating table with the #US until it forms a new government, that is expected to take office...(3/4)
Read 4 tweets
14 Jul
US inflation reaffirms 'transitory'. US inflation continued to rise and stood higher than expectations for a third month in a row. US inflation for the month of June stood at 5.4% y/y, much higher than market expectation of 4.9%. Core inflation also rose higher to...(1/8)
...4.5%, higher than the 4% consensus.
Why does this again reaffirm transitory for the Fed? This is mainly because the key drivers of inflation came from almost the same items seen in earlier months: used cars/trucks (45%), gasoline (45%), fuel oil (45%), utility...(2/8)
...gas service (16%) and transportation services (10%). These are almost entirely reflective of reopening of the economy and could moderate into the months ahead as the economy continues to normalise. July is a month when most of the US would be up and...(3/8)
Read 8 tweets
14 Jul
Vaccines seem at work in the #UK. With every incremental day of contained deaths in the UK, the efficacy of the #vaccines in containing #COVID19 mortalities appears clearer. The infection and mortality curves in the UK make this fairly clear. While the infections curve...(1/6) the UK continues to rise and is yet to see a peak, the daily fatalities have barely seen a pickup, compared to where it was the last time around. During the last wave, the mortality curve saw a pickup around a month or so after the infections curve. Looking...(2/6) absolute numbers, the 7D average (7DAvg) of daily infections is now at 34k+ and the 7DAvg of daily deaths are at 30. During the last wave, on the rising part of the curve, when 7DAvg cases stood at 34k+ (25 Dec), the 7DAvg mortality stood at 480. This can be...(3/6)
Read 6 tweets
12 Jul
Does the #US10Y yield puzzle affect India? An earlier tweet covered the various angles to the US10Y yield puzzle. The perceived softness around #USgrowth appears to stand-out as a prominent reason. During the same time last week, we saw a sharp rise in the Indian 10Y...(1/12)
...yield to 6.18%. This appears to have been on the back of the #RBI's surprising (disappointing for traders/underwriters) choice of picking relatively illiquid papers for its new tranche of G-SAP 2.0. The announcement of a new 10Y benchmark paper auctioned on...(2/12)
...Friday, with a higher traded yield was another reason. Are the US and Indian bond markets related in anyway? The answer is an obvious yes. Given that the US is a key global driver, the #Fed's policy rates naturally push monetary policy of emerging markets and...(3/12)
Read 12 tweets

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