China and Inflation

The central bank of China has raised RMB reserve requirement ratio (RRR) by 50bps third time in last 5 weeks time and 6^th times in 2010 without touching its key 1 year lending rates. The goal of course is to try to slow lending and quell inflation. This has become a huge test and challenge for the Chinese government and even bigger if we consider the Nov CPI figure which is posted at a sizzling 5.1%. On Saturday China has reported that their Nov 2010 inflation (CPI) figures reached on 28 months high (y/y). This might be a possibility that this is a number that Chinese govt. is accepting and the real number most likely is much higher than exposed. If the Chinese fail to act aggressively we could see a sharp spiral in inflation.

It is not clear that the Chinese have the political will or the financial necessity to stop this inflationary tsunami. It seems like they are not very sure about their growth and this fear is resulting in the failure to allow their currency to float which is causing economical imbalances. Another reason can be considered is under developed financial instrument in the market which is making Chinese govt’s way difficult to react on inflationary problems. Over the years, the central bank has bought most foreign currencies flowing into the country to keep China's currency yuan stable and thus injected a huge amount of yuan cash into the system, which needs to be sterilized. Heavy foreign exchange flows in recent years have left commercial banks holding too much yuan, forcing the PBOC to use bill sales and bank reserve requirement ratios to sterilize it, Wu was quoted as saying. It sounds bad but seems to be true that “if China doesn’t stop inflation then inflation may stop china.”

Weekly FX update

USD rose against most of the global currency pairs on Thursday 09/12/10. The day was significantly good which initiated volatile trading. As a result the USD not only strengthen against EURO but was looking in sound position against GBP, since the economic figures in Britain left must be desired. The increase in the demands of US Treasury bond (hence lower yields) resulted in terms of decline against JPY. Apart from all this one more news came in market that Ireland’s opposition Labour Party decided to vote against the bailout of IMF and European Union and downgraded ratings of FITCH for Ireland turned into a positive factor for strong performance of USD.

The last trading session of the week was mixed for EUR, so was the market’s reaction to the market data. The disappointing factor for EUR was the poor demand at an auction of 2 year bonds on Wednesday (the third German bond sale in a row was undersubscribed). The good news was from US Treasury yields which helped EUR to cover most of its losses. The GBP was selling off against USD by the end of last trading session of the week. According to a report house prices in Britain went down (Y/Y basis) first time in last 12 months. The trade balance deficit grew to 8.5bn against 8.4bn (September) and 8.1bn (expected). According to a forecast, growth is slowing down, though the price is still creeping up, which may give the BoE new reasons for the toughening – and it can in no way be considered a positive factor for the British economy.

The pair USD/JPY declined on Thursday’s session and a mixed response on next session. US yields came off a little, which is a dollar negative, plus Japanese exports grew. Strong demand for the US 30-year bonds reduced yields a bit, triggering the dollar’s fall and, as a result, the yen’s strengthening. If there are no surprises in debt markets, in regards of US Govt. Bonds, this pair should perform consistently. Some rumours are circulating that China could raise interest rate which most likely will be a kind of support for USD despite of positive unemployment claims data.

Equity markets in India tumbled badly and underperformed all Asian peers and ended lower around 2.3% which was one of the reasons behind low performance of INR which closed low 0.3%. Some major economic events can be noted down as:

1. The total borrowing from Banks under RBI’ LAF was accelerated (124,780 Cr. On 9^th Dec, 2010)
2. Bond prices continue to consolidate. Yield on 10 yr benchmark Govt. bond almost ended flat.
3. INR ended lower against all major currency pairs.
4. FII’s outflow continues to accelerate (on week ended Dec. 9 the net sell was approx USD 287.63mn in equities while net buy was approx USD 3.4mn debt instruments.

Comments are most welcome.

Currency Options

Trading in Currency Options on the Currency Derivatives Segment was launched today. Near month contracts of Rs 45 call and Rs.44.50 put witnessed maximum liquidity and tight bid-ask spreads of 0.25 paise (1 tick). More than 3 lac contracts (about USD 300 million) were traded during the day with an Open Interest of about 95,000 contracts (about USD 95 million). Put call ratio of 2.8 : 1 was observed.

The first trade in the currency options was executed by East India Securities Ltd. About 130 members including State Bank of India, Axis Bank, IDBI Bank, Standard Chartered Bank and IndusInd Bank actively participated in the trading. Amongst the Bank participants Standard Chartered Bank executed the first trade.

Rising interest rate and Economy

As FINMAN Mr. Mukherjee announced in his budget speech about his planning to bring down fiscal deficit from the current level of 6.5% of GDP (FY-10) to 4.8% of GDP in FY-12 and then 4.1% in following years and hopefully this announcement will result as a relief for investors. Our debt market and equity market already has been shown their favorable reflection towards this announcement as sensex surged and bond yield eased a bit within the day.
This can be said that investors were expecting to soften the bond yield as govt. will be raising lesser amount from market but however the bond yield behaved in last 12-15 day, it seems that "abhi dilli door hai". The yield of 10 year G-Sec was 7.8% on 25th Feb and shot up by 21bps after the announcement.
As there are various factors and economic events happening continuously in the market and the one important can be stated as credit growth which improved from 11% to 15% (which is latest one). There are other reasons also like very recent announcement of ICICI and HDFC bank to hike the lending rate and on another hand decision to discontinue the special home loan schemes which offers lower interest rates in first few years which means that even banks are now gearing up for higher interest rat. The interesting question to ask is :"Will rise in interest rate thwart the revival in the Indian economy?"
Most of the market pandits does not seems to agree with this as the lucrative figures and numbers are appearing regularly like few expects to 10 year G-Sec yield will remain in the range of 8%. The very recent performance of IIP which has been left negative territory and has shown much brightening picture as the latest pointer arrives at 16.8%. If the things will keep moving like this in near future then definitely a few bps hike in lending rate will not make a huge impact on economy.

New Heights...New Year Celebration

The benchmark index BSE - Sensex touches new heights on Monday 04.01.2010 and closes at 17558.73 with a rise of 93.92 points and touches 18 months high because of high global hues and strong buying in IT stocks and consumer durables stocks. There was a fear among investors that RBI may strengthen the monetary policies because of high inflation figures but market ignores all these worries and continue its running on the bull track and followed footprints of global markets and continued the surge of December.
Swinging 953.16 points ( Highest 17530.94 on 31st Dec. 2009 and lowest 16577.78 on 21st Dec. 2009), showing volatility, benchmark index touched its peak point 17530.94 on the last trading day of month and year. Closing at 17464.81 on 31st Dec. sensex displayed a high of 538.59 points over the Nov. closing. Nifty also touched 5200 level first time in last 18 months and closes at 5232.20.
FMCG and banking scripts were not in mood of celebration of new year with SENSEX and as a result of this BSE-FMCG & BSE-Bankex were down by 2.8% and 0.11% respectively while on other hand IT and CD scripts were in full mood of saying happy new year 2010 and made another record of high of in BSE-IT and BSE-CD gaining 9.02% and 8.48% respectively. The other remaining indices closes at a average gain of approx 1.83% to 8.26%.
I hope to see few more peaks in Jan 2010 because of optimistic economic outlook and very strong performance in Q3 results (corporate earnings). One more thing that market could also see some new high in terms of volumes because of extended trading hours.

Comments are most welcome.