The global risk sentiment, calming on the US-China trade war front, soured recently due to Mid-east tensions. Sanctions by the Western powers on Russian entities, in the ex-spy poisoning saga, were followed by threatened action on Russia-supported areas in Syria after last week’s alleged poison gas attack. The US economy continues to be supported by a synchronised global recovery, fiscal expansion, tax reform and the prospect of increased business investment, all supportive of growth. While the tit-for-tat tariffs excite market volatility, the recent North Korean preference for de-nuclearisation and talks helped reduce it.

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Meanwhile, the major central banks continued to send out hawkish signals, with inflation key to this impulse. At its March meeting, the US Fed raised interest-rates by 25 basis points (bps) and disclosed a steeper profile in the “dot-plot” while the Bank of England (BoE) monetary policy committee (MPC) kept the door open for a rate hike in May. The European Central Bank (ECB) remained firmly on the path of gradual monetary policy normalisation while expressing concern over trade wars and the impact of Euro’s strength, especially on inflation. The Bank of Japan (BoJ) is the only one as yet undecided on the removal of policy accommodation.

The Euro slipped to $1.23 as it still suffers from the uncertainty around Italy’s hung Parliament and over-bought speculative positioning. Pound Sterling surged past $1.42, helped by resolving Brexit issues and hawkish BoE intent. Crude oil surged to $73 per barrel, a four-year high, on Saudi Arabian bias ahead of its 2019 Aramco initial public offering (IPO) and fears of the ‘cold war’ blush to the Syrian conflict.

The rupee started firmly in the new fiscal year with ample FDI inflows/IPO subscriptions and Reserve Bank of India’s (RBI) investment relaxations. Covert intervention helped contain rupee strength to around 64.75/$. This approach has incremented RBI FX reserves by over $54 billion in FY2018 to a record $424 billion. However, weakness in financial markets and rumoured defence payment-related dollar purchases caused the rupee to depreciate to 65.4550/$. The economy cantered nicely with February IIP rising by a robust 7.1% while March CPI inflation moderated to 4.28%.

The 10-year government bond yields softened dramatically to 7.122% firstly on RBI permission to stagger provisioning for MTM bond losses. Then, the RBI MPC left rates unchanged but reduced its CPI inflation expectation while keeping GDP growth rates up! Later, the enhancement of the foreign portfolio investor (FPI) limits in the Indian government and corporate bonds till FY2020 added to the bullish trend. But profit-booking by the PSU banks, bond issuance by states and the oil price surge pulled the yields up to 7.546%.

In the coming weeks, we expect the rupee to be restrained at 64.80/$ and rise past 65.50/$, as a key state election will only add to the global geopolitical situation.

By Mohan Shenoi
(The writer is president and chief operating officer, Kotak Mahindra Bank)
(Source, DNA)