RBI's MPC Minutes: Members Will Continue to be Accommodative

Slower than anticipated growth in China, lockdown measures to contain spread of Covid-19 and sooner than expected tapering signal from Fed minutes drove DXY index to a 9-month high. Global equities sold-off. Yields were lower. So was oil and other commodity indices. US retail sales and housing starts too were weaker than expected. Indian yields too fell. MPC minutes reveal members likely to continue to be accommodative into Q4FY22. India’s growth for first quarter of 2021-22 will be released this month and will give direction to how soon RBI may move (RBI’s estimate is 21.4 per cent). 

Bonds: Global 10Y yields closed lower led by rising Covid-19 cases as few countries or regions went into lockdown measures to control the spread. US 10Y yield fell by 2bps (1.26 per cent) with softer than expected retail sales and housing starts. Crude prices fell by 7.7 per cent ($65/bbl-lowest since May 2021). India’s 10Y yield fell a tad by 1bps (6.23 per cent). System liquidity surplus fell to Rs 6.9 trillion as on 20 Aug 2021 from Rs 7.3 trillion last week. 

Currency: Even with dip in US yields, DXY rose by 1.1 per cent to a 9-month high. Sharp decline in global commodity prices, decelerating growth outlook in China and lockdowns to contain Covid-19 explain US$ outperformance. Fed minutes indicated tapering to begin this year. AUD fell the most (3.2 per cent lower) as the Australian government extended its lockdown. INR depreciated by 0.2 per cent led by global cues despite lower oil prices and FII inflows.

Equity: Global indices ended the week in red as concerns over Fed tapering and spread of delta variant, kept investors on the edge.  Nikkei dropped the most (3.4 per cent) followed by Shanghai Comp (2.5 per cent) and FTSE (1.8 per cent). Sensex too ended in red (0.2 per cent) led by sell-off in metal and real estate stocks.

Covid-19 tracker: Global Covid-19 cases rose by 4.6 mn versus 4.5 mn last week. Fresh cases increased in the US (1 mn versus 0.9 mn) and Japan (0.15 mn versus 0.11 mn) and Germany (43,000 versus 27,000). In India, cases rose by 0.24mn versus 0.26mn. Our weekly economic activity tracker index rose to 97 (100=February 2020) from 96. Singapore has fully vaccinated 71 per cent of its population, Qatar at 68 per cent and the US at 51 per cent. India is at 9.1 per cent.

Upcoming key events: Major events include flash global manufacturing and services PMI, US home sales, and Bank of Korea’s rate decision. Additionally, Germany’s Ifo business index and consumer sentiment index of Germany and the US are also due. Domestically, markets will react to RBI’s MPC minutes.