FED policy week turned out disastrous despite delivering to expectation of 75 bps hike with guidance of another 100-150 points lift before end of 2022!

Then, why post-policy risk-off? Shift to rate cut cycle not an option in 2023-2024 (Fund rate >4%) to fight recession?…1/N Equities of developed & emerging markets collapsed! S&P500 down at target at 3650 (low 3647) from mid-August high 4325 for >15% collapse at set focus zone 3650-4350!

US1-2Y yield curve at 4-4.25% and 10Y yield spike at 3.65-3.85% is tell-tale of medium term rate outlook…2/N

What’s this week (24-28 August)? Will it be extended last mile rally or set up of “enough is enough” undertone? Is G3 worried on playing “U-win, I-lose” game on equities, when impact on real economy is unreal? Even if search of C-19 vaccine is done, how tough is recovery?...1/N Despite answers for these doubts is elusive, the going is good so far! NASDAQ in comfort mode at set focus 10850/11000-11350/11500 with intra-week & all-time high punch at 11326 (way above 2019 close 8972 & March 2020 low 6631) with YTD gain of >25% and >70% from C-19 low...2/N

What’s this week (17-21 August) in global & Indian financial markets?

Theme: Trump & FED dynamics continue to support “last mile” risk-on mode, while India fortunes stay mixed & nervous boxed between risk-neutral & light.

It’s good to avoid overweight on high-risk assets...1/N NASDAQ mark-time at 10650-11350/11500 (close above 11K) is good beyond high 11126 for 11500-11850 (stop 10650)

S&P500 held steam above 3300 preparing for new high above 3393 towards peak 3500 (stop 3300)

DJIA in catch-up act lifting support at 27350-27500 for 28150-29568...2/N

Global Markets this week: Comfort from developed markets is no tailwind cheer for India!

US Presidential election gets near, and rally in US equities & Gilts gets bigger!

NASDAQ leads the show with upside break at 10350-11000 (high 11126) building steam for 11850-12350...1/N S&P500 bounce from 2950-3000 hit target 3350-3400 (high 3353) and set for new high above 3393 towards 3650-4000.

DJIA is into catch-up act inching up from 26500-26650 to over 27100 with pull bias towards all-time high 29568.

Last mile uptrend intact & into extended one...2/N

Major take-away from 6th August @RBI Monetary policy review:

(a) Despite being accomodative, effective policy rate is not away from the bottom - can’t push deposit rates down any further

(b) No issue on liquidity infusion, but large reverse flow in R/R counter is worry...1/N (c) Concerned poor credit growth in banking sector, hence special dispensation for Gold loans increasing LTV from 75% to 90%

(d) Unable to fix a number on FY21 GDP contraction despite seeing downside risks

(e) Mixed outlook on headline CPI inflation, extended rate pause...2/N

When there’s discussion on use of MMT for deficit financing & monetisation to revive growth momentum, leading to higher output creation for generation of more jobs & wealth to set up formation of “virtuous cycle”, it wouldn’t be complete without getting banking sector up...1/N Banking sector resolution needs shifted from bad to worse from pre to post C-19 impact. There’s lot of sound bytes in the public domain for need of more capital infusion or set up of bad bank or any other out of the box measure to resolve pre-Covid GNPA baggage of ~10%...2/N

What to expect from @RBI on 6th August across (a) policy rate action (b) liquidity action (c) Status of C-19 moratorium ending on 31st August and (d) restructuring of C-19 impacted loans?

Although these matters look to be straightforward, but complex for effective decision...1/N Policy rate action: @RBI is expected to have comfort on benign inflation (despite elevated headline) and concerned on growth contraction - H1/FY21 by >10% and the need to catchup in H2 squeezing top-line GDP gap between FY20 & FY21, hence need to retain accommodative stance...2/N

What’s this week in Global markets when growth in tumbling mode?

Growth contraction in H1/2020 is to expectation despite being severe, but recoup momentum is not yet visible when worst of C-19 is not yet behind, while hope remains on launch of vaccines before end of 2020...1/N FED & other G7 Central Banks continue to support equities to prevent collapse & set up of pessimism on the real economy! Positive take-away for EMs & rest of the world is from combination of easing US Treasury yields and weak USD, not withstanding firm Gold and Brent Crude...2/N

What’s this week in global financial markets in the final lap of July?

Global equities in slippery track on elevated terrain with sell-on-recovery urge, Treasury yields down from safe haven & dovish outlook, USD beaten down below big picture and Gold in unrelenting mode...1/N It’s not the time to give up when pump-priming fiscal stimulus is not yet over, high probability of FED moving policy rate to sub 0% and positive outcome on C-19 vaccines; on the downside, yet to get grip on C-19 impact on economy, livelihood and lives, still in the dark...2/N

It’s time for @RBI to introspect on cost-benefit of economic stimulus through liquidity injection (part of ₹2 Trillion fiscal stimulus package) by purchases of Gilts, USD/INR, LTRO/TLTRO and CRR cut (combined cost of liquidity for banks at 4-5%) and getting back ₹6-7T at 3.35% How to stop the reverse flow of over ₹6 Trillion and to put them to effective & intended use within the system and to avoid neutralisation of built-up assets in @RBI balance sheet? It’s not easy when lenders are risk-averse but most see as being pushed to the corner for lending!

India MPC session is distant away (4-6 August) and retention of buy mode on run upto policy verdict is 12 trading sessions away; what could be pre-policy outlook when nothing major to emerge on policy rates - either pause or 25 bps cut, both considered non-event at this stage! There’s no issue on system liquidity but what matters is the usage of it adjusted for reverse flow into R/R counter! This is what @RBI should work on before tinkering with policy rates when operating policy rate is already very low at 3.35%! How to cut the R/R flows to zero?

What’s this week on global & Indian markets?

US equities retain risk-on mode despite most in disbelief (obviously so, when liquidity push not backed by fundamentals pull) while Treasuries gain (risk-balance) appetite and USD undertone shift from risk-off to value-buy mode...1/n NASDAQ Index lead the equities show leaving Feb’20 high 9838 (and 2019 close 8972) way behind with July high punch at 10824 and S&P500 hold on to top-quartile play of 3130-3393 (building steam for new high), while DJIA in struggle for hold at 27100-29568. Good so far...2/n

What’s the viable resolution for banking sector woes?

It’s important to identify the good, bad & ugly components of the banking sector (financial & non-financials) for this purpose - improvisation (of the good), course correction (of the bad) and eradication (of the ugly)...1/n The ugly components which needs immediate attention: (a) Lowering of GNPA of banking sector from double-digit to <5% and NNPA to <2% with PCR of >60% (b) Dilution of Credit risk-aversion for better top-line productivity (c) improved cost-income for in-built growth capital...2/n

India banking sector set for two important events: (a) one-time Loan restructuring of Covid-19 impacted borrowers (b) Bringing entire public deposit taking financial intermediation institutions - SCBs, NBFCs, HFCs and all types of Cooperative banks - under @RBI regulation...1/n What’s the impact of one-time loan restructuring? Relief from moratorium ends by end August and repayment of set-aside amount as term loan needs to be repaid before 31/3/2021 which is tough ask, hence need for restructuring to arrest spike in GNPA by end of FY21 into FY22...2/n

What are the factors influencing ₹ exchange rate when issues around macroeconomic fundamentals (growth deceleration) are universal and not India specific? More so, when India is seen to have twin-benefit from domestic expansion & shift of opportunities from China to India...1/n Most often ₹ behaviour is kind of “lull before storm” - extended calmness to sudden & unexpected bout of weakness, pull back and back to stability at de-rated range; this is the pattern from 45-50 to 75-80 since 2010, not bad given the elevated USD/INR yield differential...2/n