The month of November can be described as the month of great deceleration globally which was a relief to all stake-holders – policymakers, investors and general public.  Inflation, which had been falling in the past few months, got some momentum on the downside and came lower than expected in most major economies.  This meant that the policy rate hikes that Central Banks had done over the past 18 months had their desired effect though with a lag.  However, while the markets took the development with both hands and rallied across all segments, Central Bank speakers continue to adopt a cautious line and were pushing back against market expectation of timing & extent of rate hikes in the year ahead as they were not yet ready to declare victory over inflation.  

Disinflationary Trend (Annual Cpi %)

Country	Nov-23	Oct-23	Peak in cycle
U.S.A.	3.2	3.7	9.2
EUROPE	2.4	2.9	10.6
U.K.	4	6.7	11.1

However, a note of caution on assuming continued deflationary trend is warranted.  Base effect was favouring lower indices in some countries and it was also helped by the sharp fall in energy prices which remain volatile and one cannot rule out a spike up with deliberate supply reductions through output cuts by oil producing countries.  Another factor to be borne mind, which some FED members have been hinting at is that the easing of financial conditions and risk asset rallies (which create wealth effect can once again push up demand led inflation through higher consumption).   

Global Economies

We saw refreshing news of some stability in economic updates from both China and Europe during the month, while U.S. economy continued to throw up mixed data.  But on the overall growth rate, U.S. won the contest hands down as the second estimate of GDP for July-September quarter came at 5.2%, beating forecasts of 5% and previous quarter growth rate of 2.1%.  Total output of goods and services grew at its fastest rate in nearly two years.  Consumption, which accounts for 70% of the US economy rose 3.6% annual rate and Government spending rose 5.5% on annual basis, both of them accounting for the big rise in the GDP.  In contrast, Europe continued to struggle with a growth rate of 0.1% vs. previous estimate of -0.1%, while UK recorded a flat growth for the quarter.  In Europe both Germany and France recorded negative growth rate of -0.1%.  

EU actually cut Eurozone 2023 GDP forecast to 0.6%, down from a Sep forecast of 0.8%.  UK saw the flash reading of composite index jumping to expansion territory at 50.1 from 48.7 in October. 

The reading indicated a stabilization of UK private sector output after marginal reductions in the previous three months. 

Country	U.S.A	EUROPE	U.K.	JAPAN	CHINA	INDIA
Particulars	current vs. prev	current vs. previous	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.
GDP QOQ	5.2 vs. 2.1%	-0.1 vs. 0.2%	0 vs. 0.2%	-0.5 vs. 1.1%	4.9 vs. 6.3%	7.6 vs. 7.8%
Ind. Prod YOY	-1.7 vs. -0.9	(5.1) vs. (2.2)	0 vs. -0.5%	-4.4 vs. -4.4	4.6 vs. 4.5%	5.8 vs. 10.3%
PMI Mfg.	49.4 vs. 50	43.8 vs. 43.1	46.7 vs. 44.8	48.1 vs. 48.7	49.4 vs. 49.5	56 vs. 55.5
PMI Services	50.8 vs. 50.6	48.2 vs. 47.8	50.5 vs. 49.8	51.7 vs. 51.6	50.2 vs. 50.6	58.4 vs. 61
Jobless rate	3.9 vs. 3.8	6.5 vs. 6.5	4.2 vs. 4.2	2.6 vs. 2.7	5 vs. 5.2	10.5 vs. 709
Headline Inflation	3.2 vs. 3.7	2.4 vs. 2.9	4.6 vs. 6.7	3.3 vs. 3	0 vs. 0.1	4.87 vs. 5.02%
Core Inflation	4.1 vs. 4.3	3.6 vs. 4.2	5.7 vs. 6.1	2.9 vs. 2.8	0.8 vs. 0.8	4.2 vs. 4.6%
Consumer Confidence	102 vs. 99.1	-16.9 vs. -17.9	-24 vs. 0-30	36.1vs. 35.7		92.2 vs. 88.1

Japanese Economy 

Shrank at its fastest annualized quarterly pace in two years in the July-September period, as rising domestic inflation weighed on consumer demand, adding to export woes as demand waned.   In China, Data on Industrial Production and Retail Sales showed improvement for the second successive month adding to optimism of the second largest economy recovering. However, even so, the real estate downturn continued to drag down investment in fixed assets. Jobless rate was stable at 5% but there was no update on the youth unemployment rate, which hit a record high of 21.3% in June.

A general improvement in the manufacturing is observed although some economies still have a contraction.  In Germany, for instance, industrial production dropped once again in September for the fifth consecutive month and Industrial production is now more than 7% below its prepandemic level, more than three years since the start of Covid-19.   Employment component of the PMIs is weakening too, which is good news for the doves.  

Housing Sector Remains Depressed 

U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market.  Barring a rebound in November and December, home re-sales this year are on track for their worst performance since 1992.

Bond Market

Bond Markets had their best month since 1980s sparking Cross-Asset rally.   In a year in which little has gone right in the US bond market, November turned out to be a month for the record books.  Yields plunged across economies with initial reaction coming to the weak unemployment report from USA and got downward movement after inflation rates were seen much lower than previous months.  Even the leading indicators across economies showed a downward trend sparking expectation of early rate cut by the FED and ECB.   

Tenor	2 Year		10 Year
COUNTRY	Current	Prev. month	Current	Prev. month
U.S.A.	4.55%	4.73%	4.33%	4.92%
GERMANY	2.81%	3.07%	2.45%	2.81%
U.K.	4.59%	4.79%	4.18%	4.52%
JAPAN	0.04%	0.16%	0.68%	0.95%
INDIA	7.26%	7.32%	7.28%	7.35%

As can be seen most countries saw lower yields as markets expect Central Banks to start easing rates much earlier.   According to Fedwatchtool fed will cut rates by at least 0.25% as early as May 2024 (some even predicting March 2024), while in Europe rate cut is expected in April.  Both Central Banks are expected to cut rates by up to 1% next year.  The expectation of rate cut in UK is much further down the line as their inflation is still far higher than the target rate of 2%, though it has fallen substantially in recent months too.  China is still on easing path to support the economy as their inflation is still low while investors are speculating on when the Japanese Central Bank will start raising rates (current expectation is for April 2024). 

Equities

Yield plunge spurred advance in stocks, credit and emerging markets. Investors see scope for more gains with Fed cuts on horizon. Investors frantically bid up the price of shares igniting a powerful pan markets rally.   

MARKET	1st Nov 2023	1st Dec 2023	Change	% Change
DOW JONES	33,081	36,425	3,344	10.11
S&P500	4,205	4,593	388	9.23
NASDAQ	12,887	14,305	1,418	11.00
GERMAN DAX	14,851	16,397	1,546	10.41
UK FTSE	7,321	7,529	208	2.84
CHINA COMPOSITE	3,038	3,031	-7.0	-0.23
JAPAN	31,311	33,431	2,120	6.77
INDIA NSE	19,064	20,267	1,203	6.31

It is observed that equity volatility has fallen to multi-year lows (indication of complacency) with investors chasing stocks aided by abundant liquidity without regard to valuations.  

Currencies

It was a weak month for the Dollar with DXY recording a sizeable fall of more than 3% with EURO and GBP making handsome gains, followed by Chinese Yuan, Yen and AUD.  

CURRENCY	1st Nov 2023	1st Dec 2023	Change	% Change
Dollar Index	106.67	103.27	-3.40	-3.19
EURUSD	1.0577	1.0881	0.03	2.87
GBPUSD	1.2150	1.2700	0.06	4.53
USDJPY	151.31	146.81	-4.50	-2.97
USDCNY	7.32	7.14	-0.18	-2.42
USDINR	83.27	83.26	-0.01	-0.01

Fall in the Dollar was the direct result of US Yields falling and rising expectation of early rate cut by the FED.  U.S. economy softening adds to these expectations, notwithstanding the GDP of 5.2% in Q2 which was ignored by investors, being a backward-looking data. Falling yield helped Yen to recover too which was a surprise, given the super-easy policy pursued by the Japanese authorities and promising to do more if economy required. At the same time, they kept voicing concerns on Yen weakness hinting at action. However, USDJPY fell without an actual intervention. The other surprise came when USDCNY fell nearly 3% which had twin reasons – economy showing tentative signs of stabilizing in some sectors and fall in US Yields narrowing the differential with China. The meeting between the Chinese Premier and President Biden on the sidelines of APEC meeting in U.S. was another trigger as markets perceived their meeting as a positive development.

Indian Economy and Markets 

Indian economy continued to show its superior placement in the global picture.  July-September GDP came at a forecast beating 7.6% (expected 6.8%) aided by higher consumption, manufacturing expansion and higher Government spending.  The buoyant growth was underpinned by cyclical factors like robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year, and a boisterous financial sector.  This reading presents some upside to FY24 GDP, but growth is likely to moderate in the coming quarters as consumption growth is likely to slow post the festive season, and some slowdown in credit growth also expected.  

Inflation moderated further, helped by drop in vegetable prices and some favorable base effect.  It is likely to remain volatile due to big influence from food prices.  Due to Government subsidy fuel inflation trended lower.  While the inflation has been within the overall band of 2-6% mandated to the MPC, RBI Governor has recently reiterated that 4% is what the Central Bank is focused on.  Meanwhile, the WPI index continued to show deflationary trend.  

With growth remaining strong, we expect MPC to remain on vigilant mode and keep policy unchanged and maintain the stance of withdrawal of accommodation.  

India’s merchandise trade deficit hit a new all-time high of USD 31.46 bio, vs. forecast figure of USD 20.50 bio.

Particulars		Oct-23	Sep-23	Oct-22
Merchandise	Exports	33.57	34.47	31.60
	Imports	65.03	53.84	57.91
Services	Exports	28.70	29.37	25.30
	Imports	14.32	14.91	31.51
Overall Trade (Merch. + Serv.)	Exports	62.26	63.84	56.90
	Imports	79.35	68.75	71.42
Net Trade Balance		-17.09	-4.92	-14.52

                                                                                                                  All figs. In USD Bn

As can be seen from the above tables, deficit has been higher both on a YoY basis and MoM basis and even the net deficit (Merchandise + Services) shows a jump of over USD 12 bio compared to September.  Major contributing factor for the big rise in deficit is gold imports which rose by 95% during October (with festival season demand impacting) and the rise in crude prices since September which is reflected in October deficit.  While exports have actually dropped slightly, imports have surged by USD 11.18 bio.  On YoY basis, however, exports have shown an increase both on merchandise and services.  

Indian stocks gained over 6% during the month, helped by higher GDP growth and a strong rally following the state election results.  

Despite various positives going for the economy, the INR remained on the weaker side as strong demand unmatched by supplies from flows, kept the upward pressure on the Dollar.  The recent improvement in global factors like fall in US Yields, USD index falling, improvement in China Yuan and lower oil prices have not helped Rupee to move away from its weakest levels.

Surprisingly, the good GDP number last week and the state election results which indicate a possible stable government formation in next general election has also been ignored by the Rupee.  At the same time, upside of the USD has also been limited due to the persistent intervention from RBI.  

Outlook

Global markets have seen good two-way volatility during the year in all segments (yields up and down, stocks down and up while the Dollar has seen alternating bouts of bullish and bearish plays.   As we step into the last month of the calendar year, the volatility is expected to decline with a lot of suspense regarding the Central Banks’ monetary policy approach in response to the fall in inflation and weakening economies.  In the past, we have seen that rate cuts happen when there is a systemic crisis or when the economy slumps big.  Hence we expect Central Banks to maintain their neutral and data dependent tone for some more time.

Going forward, the fiscal situation of the U.S. is likely to become a big headwind for the global markets as their deficit has risen by 23% this year. US debt interest bill has also rocketed past $1tn a year. It’s 4% of annual US GDP having doubled in 19 months. It is equivalent to 16.3% of the entire Federal budget for fiscal year 2022.   While the heavy borrowing due to the same keeps the yields supported, in medium term this may result in a big depreciation in the value of the Dollar.  

Taking note of the severe fiscal situation of the US government, Moody’s Investors Service signalled it was inclined to downgrade the nation because of wider budget deficits and political polarization. The rating assessor lowered the outlook from stable while affirming the nation’s rating at AAA, the highest investment-grade notch. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said.  This did not have an immediate impact on the markets as FITCH another rating agency had already done it back in May this year.  However, it does have a negative medium term implication and add to a depreciation tendency for the Dollar.   

Indian Rupee Outlook

State election results – encouraging for investments 

The final results of the elections announced for four of the five state assemblies that went to the polls declared on 3rd December did spring a surprise which can turn to be a positive for the Indian financial markets including the Rupee.  The BJP which was expected to win only one State out of the five, run a close contest in another and lose the remaining, ended winning three of the four with clear majority.  This has not only beaten all forecasts (just like many of the US economic numbers have been) but has significance for the political development in the next few months when Parliamentary elections will be held.  Going by the current popular support, the ruling party at the centre could do well and ensure a stable government for third time running, which will be a huge positive for the investors.  

Global investors who had been holding in check much of their investments in last few months in view of the possible uncertain political situation would heave a sigh of relief at these election results.  A positive view taken by them can result in fresh inflow of funds into the Indian market, and more importantly to the FDIs that will relieve a lot of pressure on the Rupee which may actually start to strengthen.   

In the short term, however, rupee is likely to remain under pressure due to lack of flows and higher deficits.  

Technical Outlook

USDINR

The range for the currency pair continues to narrow, although with a new high due to technical glitch once. The pair as long as continues to trade in the range 83.00 and 83.40 should be looked as the range extremes and suitable actions around these levels should be taken for risk management purposes.

Commodity Outlook (Gold)

GOLD: COMEX: XAUUSD: CMP: USD 2025

Gold broke above its all time high, resisted thrice earlier in the past 3 years (USD 2070), in a thin early Asian market with less liquidity. The prices then corrected in its follow through during the day with profit taking actions in sight. The metal gave up gains during the day to close back below the USD 2070. 

The metal is expected to remain bullish in as the US Real Yields start to decline again, making way for the metal to rally. Buy on dips can be the suggested action for gold with a rise in the uncharted territory to be seen again during the month.

Supports around USD 2000 and USD 1960 to hold any downside action for the month. The metal is expected to move upside with eventual targets around USD 2260 and USD 2300 in the next 36 months’ timeline.

Even against INR, the precious metal made a new all-time high breaking above 61850 levels in the last week sustaining well above these levels. Support for the commodity against INR is expected around INR 61,250 and then around INR 59,600 (less likely to see prices beyond these levels). 

The expectations primarily continue to be bullish for new highs to be seen in the coming few months. Initial resistances are expected to be at INR 64200 although this is further expected to be broken for a next move towards INR 68,300 levels in the next 3 months.

The break of ATH and decrease of Real Yields have most likely kickstarted a new bull run for the precious metal in the longer time frame.

Macro Update

The past month had a negative surprise of sudden eruption of war in the Middle East which impacted markets to a great extent, but subsided gradually as it has so far not escalated into a larger conflict.  In an act of terrorism for which Israel was totally unprepared, on October 7th 2023, thousands of armed military wing members of Hamas tore down large parts of the Gaza security fence using tractors, RPGs and explosives and invaded southern Israel. Simultaneously, Hamas military wing in Gaza fired thousands of rockets toward Israel.  Over 1,300 civilians were murdered, and over 200 were abducted. The Hamas military wing briefly took control of about 10 Israeli towns, terrorizing and brutalizing their residents. Israeli Defence Forces (IDF) forces operated to neutralize this military wing and thwart their infiltration; however, they were also ambushing IDF bases, killing soldiers and hurling grenades and explosives. The State of Israel has never encountered such a large-scale, calculated attack on the Gaza front. Hamas stated that their initial attack was due to the occupation of West Bank by the

Israelis.  

Israel which was in a state of shock due to unanticipated attack, responded very strongly, mobilized 300000 reserves and attacked with a barrage of airstrikes that have decimated the Gaza Strip, leaving more than 350,000 residents displaced and their defense minister ordering a “complete siege” of Gaza Strip cutting electricity to the region and blocking fuel and food from entering the territory from Israel.  PM Netanyahu vowed to demolish Hamas.  The casualties on Palestinian side is reportedly around 8000. The whole world was in a state of shock looking at the number of civilian casualties and human sufferings and called for cessation of the attacks and for ceasefire, but Israel has continued with their ground attack which has so far been limited.  Almost no one wanted an escalation of the war, particularly involvement of larger Arab countries like Iran which can then take the conflict to a global level.  It is believed that Iran helped Hamas’ attack on Israel for several weeks before October 7^th.

Global Market’s Reaction:

There was a big impact on the global markets with stocks falling, Dollar rising, bonds being bought as safe haven and gold making a big stride.  However, even attacks reduced somewhat markets have settled down (believing that global efforts to de-escalate will succeed) and started re-focusing on the economy and monetary policies.  However, we are not certain that things will settle down completely easily and there will be simmering violence that will keep geopolitical situation on the radar of markets for a long time. 

GLOBAL ECONOMIES: 

Even as HIGHER FOR LONGER in interest rates remained the policy of most Central Banks, economies started/continued to show slowdown as tight financial conditions and unaffordability affected consumption and activities.  However, on a relative basis, U.S. economy was still quite strong where consumption continued to support although cracks seem to be appearing there as well.  Euro Zone showed negative growth on QOQ basis but on YOY basis grew just 0.1%.  UK showed 0.2% growth on QOQ basis, but the Central Bank forecasts showed growth headed for a sharp slowdown.  Inflation was seen easing across the major economies supporting the PAUSE in rate hikes by the respective Central Banks.  US grew 4.9% beating forecasts which were at 4.3%.  China seemed to be starting stabilize responding to various measures initiated by the Government, but it is too early to conclude they have turned the corner.  India confirmed its fastest growth and lowered inflation, but activity surveys indicated slowdown. 

	U.S.A	EUROPE	U.K.	JAPAN	CHINA	INDIA
Particulars	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.
GDP – QoQ (%)	4.9 vs. 2.1	(0.1) vs. 0.2	0.2 vs. 0.3	1.2 vs. 1.5	4.9 vs. 6.3	7.8 vs. 6.1
Ind. Prod. – YoY (%)	0.1 vs. 0.1	(5.1) vs. (2.2)	1.3 vs. 1.0	(4.6) vs. (4.4)	4.5 vs. 4.5	10.3 vs. 5.7
PMI Mfg.	50.0 vs. 49.8	43.1 vs. 43.4	44.8 vs. 45.2	48.7 vs. 48.5	49.5 vs. 50.6	55.5 vs. 55.7
PMI Service	50.6 vs. 50.1	47.8 vs. 48.7	49.5 vs. 49.3	51.1 vs. 53.8	50.4 vs. 50.2	58.4 vs. 61.0
Jobless rate (%)	3.9 vs. 3.8	6.5 vs. 6.4	4.2 vs. 4.1	2.6 vs. 2.7	5.0 vs. 5.2	10.5 vs. 7.09
Inflation – Headline (%)	3.7 vs. 3.7	2.9 vs. 4.3	6.7 vs. 6.7	3.0 vs. 3.2	0.0 vs. 0.1	5.02 vs. 6.83
Inflation – Core (%)	4.1 vs. 4.3	4.2 vs. 4.5	6.1 vs. 6.2	2.8 vs. 3.1	0.8 vs. 0.8	4.6 vs. 4.8

MONETARY POLICIES: 

We have had monetary policy decisions from the four major Central Banks of Europe, Japan, US and UK in the past one week with all of them maintaining status quo on policy rates.  Earlier we also had the Canadian and Australian Central Banks maintaining unchanged policy despite recent rise in inflation.  Thus they kept door open for more action, if needed.  

EUROPE: Economic concerns have dominated while inflation has dropped substantially, which is conveyed through ECB’s message and we may well have seen the peak in their rate.   The ECB President said that impact of huge rate rises were still working through the economy. 

JAPANESE CENTRAL BANK has been sending out conflicting signals.  While loosening their stance on Yield Curve cap at 1% for 10 year JGBs, they have been seen indulging in fresh bond purchases still.  They do not think time is ripe for any policy change despite economy showing good improvement and inflation remaining high. 

Meanwhile, they continue to verbally intervene on the exchange rate.  

U.S. FEDERAL RESERVE left the policy rate unchanged when they met on Wednesday, but their statements indicate that they are focused on getting inflation back to 2% target as it hovers under 4%.  They expect to see continued impact on the economy through tightened financial conditions but are now sure how long it will impact. Market discounting shows that the policy rates will remain on hold till January (next two meetings), though FED keeps the door open for further policy action depending on the upcoming data.  

U.K. CENTRAL BANK went for a second consecutive pause in policy rate at 5.25% but published forecasts show the economy skirting close to a recession.  The central bank said it expected no growth in Britain’s economy in July-September, edging up to just

0.1% in the fourth quarter, with zero growth forecast for 2024 and an expansion of just 0.25% in 2025.  Their inflation projections show that they will maintain HIGHER FOR LONGER policy just like the FED.  

MARKETS: 

Markets have been volatile during the month, particularly in stocks and bonds.  Bond yields have actually been guiding moves in other markets, viz. stocks, currencies and commodities.  

BONDS were weaker in earlier part of the month (yields higher) as increased supply from the US Treasury was not getting enough buyers.  Initial dip in the yields came when the Middle East war started.  But as situation seemingly eased they rose again.  Subsequently, when the US Treasury announced plans to borrow less of long term treasuries they started easing again and the real fall came when the US non-farm payrolls report came weaker than expected, unemployment rate increased and the wage inflation month-on-month eased.

COUNTRY (all figs. In %)	2 YEAR		10 year
	Current	cycle high	Current	cycle high
U.S.A.	4.85	5.26	4.58	5.02
GERMANY	3.04	3.39	2.64	3.02
U.K.	4.67	5.56	4.33	4.74
JAPAN	0.14	0.16	0.91	0.96
INDIA	7.29	7.56	7.32	7.40

Long term yields have now fallen more than 0.5% from their cycle highs and the yield curve has steepened again (difference between 2 year and 10 year yields further increasing), a sign of future recession that analysts have been hinting at.  Bond yields in other major nations followed that of the U.S.  In Japan 10 year yields have risen close to 1% and Japanese authorities are likely to be more relaxed on its rise.

EQUITIES: Stock markets were volatile and were in a falling trend for most of the month, impacted by higher yields and the war factor.  However, they got some support initially through earnings report for Q3 coming better than forecast and the yields coming off substantially.  

MARKET	01-Oct	04-Nov	Change (Abs)	Change (%)
DOW JONES	33,431	34,061	-630	1.88
S&P500	4,280	4,358	-78	1.82
NASDAQ	13,216	13,478	-262	1.98
GERMAN DAX	15,439	15,189	250	-1.62
UK FTSE	7,608	7,417	191	-2.51
CHINA COMPOSITE	3,100	3,030	70	-2.26
JAPAN	32,101	31,949	152	-0.47
INDIA NSE	19,079	19,230	-151	0.79

NASDAQ and S&P500 both fell more than 10% from their recent highs and briefly entered correction territory.  But they have since bounced strongly to gain 7.5% and 6.2% respectively.  Composite index of global equities also gained 5.5% from their recent low after war getting less intense and yields falling.  

CURRENCIES: The U.S. Dollar maintained strength for most part of the month, supported by safe haven flows due to the Middle East conflict and also higher yields.  

Currency	01-Oct	04-Nov	Change (Abs)	Change (%)
Dollar Index	106.17	105.02	-1.15	-1.08
EURUSD	1.06	1.07	0.02	1.52
GBPUSD	1.22	1.24	0.02	1.43
USDJPY	149.48	149.37	-0.11	-0.07
USDCNH	7.34	7.29	-0.05	-0.74
USDINR	83.25	83.14	-0.11	-0.13

However, Dollar started to lose ground gradually mainly to the EURO and the UK Pound as war situation eased somewhat, de-escalation efforts intensified and the yields started to come off.  It was really significant that EURO maintained good demand despite the Euro Zone economy continuing to underperform the U.S. and ECB itself sounding quite dovish on the growth prospects.  

USDJPY almost hit the previous high at 151.94 (from where we had seen a big drop to below 128 last year) and has since retreated along with general Dollar weakness. We have so far seen only verbal intervention from Japanese authorities and no actual selling of Dollars has been seen.  However, the same is not ruled out should we see further weakness.  Chinese Yuan stopped falling this month and the USD held below 7.34 with investors watching to see if the economy stabilizes as some green shoots were observed.   Among commodity currencies, AUD was stronger on higher inflation number and better economic performance while Canadian Dollar underperformed as oil failed to maintain its uptrend after initial rally in the wake of the war.

OUTLOOK FOR GLOBAL MARKETS: 

The slowdown of the U.S. economy and the result effect of pushing down the yields is good for the risk assets and for non-Dollar currencies.  However, though U.S. Government tweaked the tenor of borrowings, they are still going to borrow much more this year from the market than last.  Their fiscal deficit more this year by 23% and reportedly over a trillion Dollar worth of bonds are maturing this year which they need to roll over at a higher rate and that will further push up the deficit.   The major headwinds for the market will be-

1. Escalation of the war into a wider conflict and its implications for inflation. 
2. U.S. Housing market sharp slowdown; mortgage rate highest since 2000 at 8% and affordability at multi-decade lows.  
3. Possibilities of another shutdown of the U.S. government after November 14 and spending bills being stalled.
4. Higher Real Yields pressure stock market sell-off.
5. HIGHER FOR LONGER rate policy by Central Banks will slow the economies sharply resulting sell-off in risk assets and affect carry trades.
6. Change in Japanese monetary policy also affecting carry trades.
7. Without major structural reforms, China slows down further sharply.
8. Widening of Germany-Italy bond spreads can lead to another debt crisis in Europe.
9. Delinquency rates on credit card at above 2008 levels in the U.S. 

Any sharp slowdown in the global economy would be negative for risk assets and for EM currencies which depend on overseas capital.  However, we see the Dollar Index has technically seen a possible medium-term top at 107.35 and more falls are likely.  

INDIAN ECONOMY AND MARKETS: 

There has been mix of good and bad news for the Indian economy.  On the good side, growth has been far higher among the major economies and inflation has sharply moderated.  However, capital flows which are crucial for the country to fund its current account has been eluding in the last few months.  After an average of USD 4 bio p.m. from FIIs seen from March to August, we have seen negative flows from September onwards to a cumulative amount of nearly USD 4 bio.  The FDIs have also been far less this year from April to August compared to last year (USD 3 bio in 2023 vs. USD 18 bio in 2022).  In addition, we have been seeing consistent outflows on account of ECBs.  Due to higher interest rates abroad, corporate are not rolling over their borrowings and prefer to repay the same by borrowing in domestic market.  

All the above factors would have normally pressured the USDINR higher and more so because the Real Effective Exchange Rate of the Rupee is 5% overvalued as per RBI data.  However, the Central Bank has been intervening consistently to prevent the Rupee from falling to new lows beyond 83.29.  Due to consistent demand and RBI selling the rate has been held in a very tight range between 83 and 83.29 for the last two months.  This situation will only change if RBI gives up its intervention policy and allow rupee to find its level or if we see a gush of inflows which is not absorbed by the Rupee.

Two things to note is that even a bear trend in global Dollar Index is unlikely to see the rupee strengthen immediately due to its overvaluation on REER basis and the flows which are likely to slow down due to elections to the State and later to the Lok Sabha.  The expected flows due to the inclusion of Indian Bonds in the JP Morgan’s EM Bond Index will only happen in the next financial year.  Also due to the valuation concerns, FII flows to Indian equities will take some time to resume.  

We feel that if the domestic inflation falls further, we may see the RBI letting the Rupee to fall.  

Our expectation for the Rupee for the next month is to move between 82.80 and

83.80.  

COMMODITY Outlook

GOLD: COMEX: XAUUSD: CMP: USD 1985

Gold observed a brilliant rally last month after escalation of the Geo-political tensions. The yellow metal found support in the 1800s zone to rally back above USD 2000 levels during the month. 

Although the metal moved with momentum in the previous month it is yet to break above the triple top it formed around USD 2070 levels which currently acts as a formidable resistance. Break of this resistance would bring in a new rally for the metal leading to USD 2300/2400 for Gold. Immediate resistance is at USD 2015 levels. 

Small mean reversion move can be expected for the pair towards support zone before beginning of any new trending move. Supports around USD 1960 and USD 1935 can hold short term dips while much stronger supports are held at USD 1860.

GOLD: MCX Gold: CMP: INR 60880

MCX Gold wasn’t alienated in the Gold rally previous month and it moved along with COMEX gold towards it multiple tops formed around INR 61,850. Break above this should kick start another trending move on the upside but needs correction in the shorter time frame before it begins it march higher. Immediate short-term resistance can be observed at INR 61,400. Supports expected to hold this mean reversion action for MCX Gold can be around INR 59,400 and more significant supports lie at INR 57,800. Sideways action for the metal in the range for this month can be expected unless further escalation in Geo-politics is observed.