Rupee hits fresh low vs US dollar, may slide to ‘84 levels soon’

The Indian rupee fell to 83.06 in early trade today  as the surge in Treasury yields and the dollar index fuelled a broader decline in Asian currencies and equity markets. The rupee had hit a record low of 83.02 in the previous session. Asian equities tumbled today, tracking a sell-off on Wall Street, while the dollar regained its strength as surging inflation and interest rate hikes fears returned to the fore.

The selloff in U.S. Treasuries resumed on Wednesday, pushing near-maturity and longer-maturity Treasury yields to fresh multi-year highs. Yields had spiked despite a weak U.S. housing report.

The yield on the 10-year U.S. Treasury note touched a fresh 14-year high, brushing off a weak housing report. US 10-year yields were up at 4.139%.

Globally, equities are again under pressure after a fresh jump in US yields and another round of escalation over the Russia-Ukraine war. On the oil front, Joe Biden’s battle against higher oil prices continues after his administration announced the release of another 15 million barrels of oil from the Strategic Petroleum Reserve (SPR) extending the release through December," the forex advisory firm added. 

 

Core US inflation rises to 40-year high, securing big Fed hike

Consumer prices in the US rose more than expected last month in a sign that the inflation fight in the world's largest economy is far from over.

Inflation, the rate at which prices rise, was 8.2% in the 12 months to September, down from 8.3% in August.

Despite the fall, the figure was still higher than forecast.

Inflation in the US is being closely watched as the US central bank's efforts to tame the problem push up the dollar and global borrowing costs.

The rate is well above the central bank's 2% target and means the Federal Reserve is likely to continue to keep raising interest rates in an attempt to cool rising prices.

"The Fed needs to react at the next meeting and continue to keep policy tight until there is some sign that inflation is under control," said Neil Birrell, chief investment officer at Premier Miton Investors.

This print raises the level of uncertainty and is bad news for the economy overall, but for consumers in particular. The peak in interest rates will, in all probability, be higher now. It's difficult to find any positives in this for the economy or markets."

Inflation in the US has dropped back since hitting 9.1% in June, helped by a fall in fuel prices at the pump.

Costs for clothing and used cars also dipped last month.

But the issue continues to affect other parts of the economy. Grocery prices have jumped 13% over the past 12 months, and housing and medical costs are also rising sharply.

Excluding food and energy, inflation jumped 6.6% - the fastest rate since 1982.

"The composition of the inflation reading is perhaps even more worrisome than the overall number," said Seema Shah, chief global strategist of Principal Asset Management.

"Increases in shelter and medical care indices... confirm that price pressures are extremely stubborn and will not go down without a Fed fight."

The Federal Reserve has already raised interest rates five times since March, opting for unusually large hikes in recent months that have unsettled financial markets and led to sharp slowdowns in sectors like housing.

By making borrowing more expensive, the Fed is hoping to reduce demand, especially for big ticket items such as cars and homes, and ease the pressures pushing up prices.

But by slowing activity, the Fed also risks tipping the economy into a recession. Analysts see that outcome as increasingly likely, since inflation has proven stubbornly resistant to the Fed's efforts so far.

With midterm elections looming in November, President Joe Bien has tried to make the case that the slowdown in economic activity is a healthy shift from the growth surge that followed the pandemic, pointing to robust job creation and low unemployment.

"I don't think there will be a recession. If it is, it'll be a very slight recession", he said in an interview this week.

But concerns about the economy have weighed on the Democrats.

"Americans are squeezed by the cost of living: that's been true for years, and they didn't need today's report to tell them that. It's a key reason I ran for President," he said following Thursday's inflation report.

"Today's report shows some progress in the fight against higher prices, even as we have more work to do."

 

Rupee dives to another record low against US dollar

The Indian rupee continued to extend its recent slide versus the US dollar today after the solid US jobs report cemented bets of more large Federal Reserve rate hikes. The rupee fell to a record low of 82.66, down from 82.33 from the previous session.

Data on India's retail inflation, which is expected on Wednesday, likely accelerated to a five month high of 7.30% in September due to surging food prices, a Reuters poll found. A Reuters poll of 47 economists suggested inflation - as measured by the Consumer Price Index - rose to an annual 7.30% in September from 7.00% the previous month.

HOW FEDERAL BANK CREATES BUBBLES AND BUST.......

 See, post 2020, we have realised that the biggest fund managers are the Fed, they have $8 trillion, what they do, besides what happens to the markets. So, when the economy was in very bad shape in 2020, we saw the markets going up because of Fed actions at that point in time. Jerome Powell kept saying they want to create inflation, and that resulted in a very bullish market. Now the Fed and their governors are saying they want to crush inflation. So we are in a global market where the biggest fund manager, the Fed, is stressing that it wants to crush inflation so the markets keep coming down.

Growth in credit offtake at 9-yr high

 

Growth in credit offtake at 9-yr high, with retail driving demand

Bank credit grew at 16.2 per cent in the fortnight ended September 9, the highest in about nine years, aided by revival in the economic activity post-Covid, increased working capital demand, rising discretionary spending and low-base effect.

credit rose 16.2 percent to Rs 125.5 lakh crore as of September 9'22 over last year's levels. This is reckoned to be the highest growth in more than eight years and more than double the pace of 6. per cent growth in September'21.23-Sept-2022

We expect credit demand to remain high but think the financial system will scramble for resources to fund credit growth. Consequently, there could be pressure on deposit rates in the coming few months,” said Suresh Ganapathy & Param Subramanian of Macquarie Research in a recent report.

rCedit offtake saw a 16.2 per cent year-on-year robust growth, expanding by a significant around 948 basis points (bps), for the fortnight ended September 9, 2022. The growth is nearly the highest in the last 9 years (16.3 per cent credit growth: October 18, 2013),” said Saurabh Bhalerao, associate director—BFSI research, Care Ratings. A basis point is one hundredth of one percentage point

This rise in demand for loans has been driven by sustained retail and improving wholesale credit, which is likely to continue the rest of the fiscal, experts said. “There is a pick-up in the economy and we are seeing normalcy coming back in all the sectors post-Covid. The discretionary spending in the retail segment, which were being postponed, are now being bunched up. The demand for working capital demand from corporates has started,” said Suresh Khatanhar, deputy MD, IDBI Bank.

The growth in credit has been on an upward trajectory since the latter half of FY22 and has been in double digits since April 2022, despite a 140-basis point hike in repo rate — the rate at which the RBI lends money to banks to meet their short term funding needs — since May this year.

Bankers said that with hardening of bond yields, corporates are now shifting to banks from the capital market for their funding requirements.

“Earlier, when the interest rates were lower, corporates preferred the bond market route to raise funds. However, with the reversal in bond yields, they are now shifting to banks,” said Khatanhar.

The 10-year bond yield has increased to 7.35 per cent as on September 26, from around 7.24 per cent on September 2.

Credit growth has remained over 15 per cent for three consecutive fortnights now, indicating a sustained pick-up in demand. For the fortnights ended August 26 and August 12, banking credit grew at 15.5 per cent and 15.3 per cent, respectively.

But deposit growth has been trailing growth by a large margin. Deposits in the banking system grew 9.5 per cent YoY for the fortnight ended September 9. The credit-deposit gap has widened to 670 basis points and the widening gap has exacerbated concerns that slow deposit growth may emerge as one of the biggest constraints for loan growth in the system.

With liquidity in the system tightening, banks are expected to get aggressive in garnering deposits to support credit demand in the system. This is also expected to move the needle on deposit rates, which have not moved in tandem with lending rates. Earlier this week, liquidity in the banking system slipped into a deficit mode for the first time in over three years, signalling a structural shift away from loose financial conditions in the economy.

Credit growth has seen sustained a rise since April this year, despite the RBI adopting a tighter monetary policy stance. The RBI’s six-member Monetary Policy Committee has increased the benchmark repo rates by 140 basis points since May this year and consequently, the banks have increased their external benchmark linked loans by the same proportion

M-cap-to GDP September 2022

 M-cap-to GDP

The market capitalisation-to-GDP ratio, also called the Buffett indicator, has come off from a high of 112 per cent but is still trading above 107 per cent, suggesting that Indian equities are expensive. As per the indicator, stocks are deemed expensive when the value climbs above the 100 level. For India, the average 10-year m-cap-to-GDP ratio stood at 79 per cent, as much of the economy is unlisted and non-formalised.

The ratio has been volatile, reaching 56 per cent of FY20 GDP in March 2020 from 80 per cent in FY19 and then sharply bouncing back to 112 per cent in FY22. The ratio is now at 107 per cent of estimated FY23 GDP," Motilal Oswal said in a note.

Axis Securities noted that a similar upward earnings momentum, as is being seen today, was witnessed in FY10 earnings immediately after the GFC crisis, leading to the m-cap-to-GDP ratio of 95-98 per cent. With a positive earnings momentum in the current cycle, it sees the ratio improving in the coming times

PE, PB multiples
Nifty50 trades at a 12-month forward PE of 19.6 times, in line with its LPA. But forward P/B at three times is still quoting at a 15 per cent premium to its historical average.

On a trailing basis, the 12-month trailing P/E for the Nifty at 22.8 times is at a 7 per cent premium to its LPA of 21.3 times. At 3.4 times, Nifty’s 12-month trailing P/B also trades above its historical average of 2.9 times at a 17 per cent premium.

RBI hikes rate by 50 bps September 2022

 

RBI hikes rate by 50 bps

Total 190 bps hike since May to tame inflation.

The Reserve Bank of India’s (RBI’S) monetary policy committee (MPC) voted to hike the repo rate by 50 basis points (bps) to 5.9% on Friday in its fourth such move in a row, continuing the fight against inflation and remaining focused on withdrawal of accommodation.

The rate-setting panel kept the inflation forecast for the year unchanged at 6.7%, with the central bank reiterating that inflation will likely cool off to 5% in Q1FY24.

RBI governor Shaktikanta Das did sound a note of caution on inflationary pressures that could emerge in the days ahead, even as crude prices show signs of easing. “Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand and the spillovers from global financial markets,” Das said, adding that the recent correction in global commodity prices, including crude oil, if sustained, may ease cost pressures in the coming months.

The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments,” Das said. Consumer price index (CPI) inflation spiked to 7% in August, well over the MPC’s target band of 4% +/- 2%, after trending down for three straight months.

The panel also cut its gross domestic product (GDP) growth forecast for FY23 to 7% from 7.2%, with Q2 at 6.3%, Q3 at 4.6% and Q4 at 4.6%.

The RBI declined offering any forward guidance on the stance, stating only that inflation will come closer to the target over a two-year period.

Market participants saw the influence of the US Federal Reserve’s aggressive rate actions in Friday’s policy announcement. Rajeev Radhakrishnan, CIO-fixed income, SBI Mutual Fund, said, “The impact of external monetary tightening measures and its spillover effects have been evident in the policy stance and action today. To the extent that these factors prevail over the coming months, the terminal policy rate expectation locally could reset a bit higher.”

Das repeated the RBI’s line that currency market interventions are aimed solely at stemming volatility and the central bank does not target a particular level for the rupee. The future trajectory of monetary policy will be guided by incoming data and the evolving macroeconomic situation, he added.

India's market capitalisation to GDP goes past 100% again, shows dat

 

India's market capitalisation to GDP goes past 100% again, shows data

Interestingly, between 2008-09 and 2019-20, the ratio going past 100 per cent was a rarity

India’s market capitalisation (m-cap)-to-gross domestic product (GDP) ratio has once again gone past the 100-per- cent mark.

In June, it had slipped below 100 per cent, following a sharp drop in the benchmark indices. However, a bounce in the market pushed the gauge into expensive territory.

At the end of July, India’s m-cap-to-GDP ratio was at 102 per cent of 2022-23 GDP estimates, against its long-term average of 81 per cent.

Interestingly, between 2008-09 and 2019-20, the ratio going past 100 per cent was a rarity.

India’s peak m-cap-to-GDP ratio before the global financial crisis of 2008 was nearly 150 per cent in December 2017. When the Covid-19 pandemic first reared its head in March 2020, the ratio had fallen to 56 per cent.