Powell really had his Volcker moment last year at Jacksonhole, but it was quite a damp affair this year.  Powell’s words lacked the drama associated with previous speeches.  

In remarks delivered at the central bank conference in Jackson Hole, Wyoming, Powell said inflation was still too high even with recent favourable readings, and that the U.S. central bank has substantial ground to cover to regain price stability.  So they are clearly keeping door open for more rate hikes.

But at the same time, Powell noted that economic uncertainty called for “agile” monetary policy making, and that the Fed will proceed “carefully” when deciding its next policy move.

There was little bit for every one be it bull or a bear as Powell gave quite a blaanced remark.  

But other FED members had differing views on  the course the CB should take, but again depending on upcoming inflation reports.  

ECB

ECB policymakers are increasingly concerned about deteriorating growth prospects and momentum for a pause in its rate hikes is building,  But Lagarde did not deviate from her known cautious remarks and there was no hint of dovishness, hence EURO yields and the EURUSD recovered their losses.  

BANK OF JAPAN

But message from BOJ Governor Ueda was decidedly dovish as he said Underlying inflation in Japan remains “a bit below” the Bank of Japan’s 2 per cent target, and as a result the bank will maintain the current approach to monetary policy.  He even expected inflation to decline from the current levels.  

BANK OF ENGLAND

Interest rates in Britain might have to stay high “for some time yet,” Bank of England Deputy Governor Ben Broadbent said on Saturday, as the central bank seeks to curb the highest inflation rate among the world’s big rich economies.  Broadbent said in a speech that the knock-on effects of the surge in prices – such as pressure on employers to push up wages, which has led to record growth in pay – were unlikely to fade away as rapidly as they emerged.

As can be seen most Central Bankers were non-committal about policy move going forward and decidedly data-dependent.  

CURRENCY IMPLICATION – no clear influence for the Dollar from the above statements.  If anything, one could say Japanese Yen would weaken more, which did happen as it touched a147.45 yesterday from 145.75 seen on Friday.  

It looks like even the market wants to see more data to confirm US economy’s relative resilience and how the yields react.  Looking at some of the forward looking indicators like M2 declining, consumer confidence dropping, job openings falling and increasing credit card access by consumers, one could say that slowdown in the largest economy may just be starting.    If it does, it boils down to whether it is a severe slowdown or still holds better than others. 

Eventually, Bond market will give us the direction for the Dollar which looks slightly on the bullish side (yields to drop). 

UNION BUDGET 22-23

Unlike what is usually associated in the Indian Budget, the one announced this year contained nothing dramatic or path breaking and had little that concerned the common man directly.  But at the same time, it was growth and investment oriented with a reformist approach.  It did disappoint many vis-à-vis their expectations, but best thing was that the Government avoided including any populist measures, notwithstanding that we have many State elections coming up.  

FISCAL MATH – The deficit for FY 22 is exceeded by 0.1% and pegged at 6.9% of GDP vs. estimate of 6.8%, despite robust revenue collections.  This overshoot is due to higher expenditure.   But this may still come down due to increased tax collections.  But estimate for FY 23 is kept at 6.4% of GDP which looks achievable due to higher tax collections that will accrue due to higher nominal GDP which is projected at 11%.  This is despite higher budget allocation at the Central level by additional 3.5 trillion.    But importantly, budget also allows States to run a deficit of 4% vs. 3% mandated by the Finance Commission, besides allocating 1 lakh crores as 50 year interest free loan over and above the normal borrowings.  Allowing State to spend more is very positive as they contribute two-thirds of the capex.  The budgeted deficit may be easily met as the revenue estimates look quite conservative considering the projected growth.  

HIGHER GOVERNMENT BORROWINGS – The borrowing numbers at Rs. 14.95 lakh crores are higher than even the highest estimate among market participants. It’s not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion.  69% of the fiscal deficit is expected to be funded with market borrowing, which is higher than recent years.  Reliance on small savings borrowing is pegged at Rs. 4.25 lakh crores vs. Rs. 5.91 lakh crores in FY 22.  The borrowing program will be very challenging for market in a year when RBI is expected to raise rates and curtail excess liquidity.  It is not, therefore, surprising that the bond markets sold off with yield on 10 year rising more than 20 basis points from the low of the day.  

Part of the borrowing is envisaged through issuance of Green Bonds as borrowing for green infrastructure.  It is not clear how these Bonds will be made more attractive to invest in.  

GDP AND REVENUE PROJECTIONS: Nominal GDP for FY 23 has been projected at 11.1%.  Economic survey had indicated growth of 8.00 to 8.5%. Assuming inflation at even 4-5%, the nominal GDP growth should have been above 12%.    Accordingly, even the revenue projections have a touch of conservatism.   Thus, we feel the deficit target of 6.4% for FY23 will be easily met, unless we have a big overshoot in expenditure.  

HIGHER CAPEX – Budget’s clear emphasis on expanding capital expenditure is a welcome directional change particularly since a larger portion of 45.2% of fiscal deficit is being devoted to capital expenditure (Rs. 7.5 lakh crores), with higher allocations for roads and railways, but lower for financial services.  At a two decade high it spells a welcome structural change in government expenditure in favour of capital expenditures.  Further, the central government’s efforts to nudge states through incentives has aided in contributing to the recovery in capex spending by states.  This is clearly pro-growth and pro employment.  The approach seems to be to support and incentivise supply-side capacity creation for sustainable growth over a longer period of time.  

Revenue expenditure has been contained with lower subsidies for fertiliser and food as well as for the MGNREGA scheme. 

DISINVESTMENT: Disinvestment targets have been revised down (perhaps getting more realistic).  Budget estimates Rs. 780 billion for FY 22 against earlier estimate of 1.75 trillion, while for the next year it is estimated at 650 billion rupees.   Though the Finance Minister stated that the LIC IPO will happen soon, one can conclude that the size of the proceeds from the same is going to be much less, though the valuation of LIC is yet to reach the final conclusion.  It leads us to think that this IPO will be split between two fiscal years.  Smaller IPO this FY means that related FX flows will be lower which will be easily absorbed by RBI without any major appreciation pressure.  

OTHER MEASURES TO BOOST GROWTH AND INVESTMENTS: Concessional tax rate of 15% for domestic manufacturing companies commencing manufacturing or production by 31 March 2023 extended to 31 March 2024.  Profit-linked tax exemption for eligible start-ups extended by another year.  Start-ups incorporated up to 31 March 2023 will now be eligible.   Several changes to duty rates aligned to “Make-in-India” and “Atmanirbhar Bharat” policy have been made.  Proposal to phase out concessional rates in capital goods and project imports gradually; moderate tariff of 7.5% made applicable

Focus on promoting digital economy & fintech, technology enabled development, energy transition, and climate action.  SEZ Act to be replaced by new legislation to enable states to become partners in ‘Development of Enterprise and Service Hubs’.

TAXES: There have only been minor changes in the taxes, like capping surcharge on LTCG at 15%, tax relief for differently enabled persons, establishment of faceless customs, removal of some of the age-old duties and exemptions, simplification of custom rate and tariff structure particularly for sectors like textiles, chemicals and metals.  Further, more rationalizations have been introduced to encourage domestic production. For the gems and jewelry sector which has contributed to a big surge in exports,   customs duty has been cut on cut and polished diamond and gemstones, besides implementing a simplified regulatory framework to facility export of jewellery through e-commerce.    

Income from virtual digital assets (including crypto currencies) will be taxed at 30% with only cost of acquisition being allowed a deduction. Gifts of virtual digital assets will be a benefit taxable in the hands of the recipient.  TDS at 1% introduced for virtual digital assets transactions.  

IMPLICATIONS FOR MARKETS: Higher borrowings and uncertainty about timing of including India bonds in the Global Bond Index are negative for the money market and yields will see upward pressure.  However, as foreigners’ holding of Indian Bonds is far less now, we may not see a big forex outflow due to the same.  On the other hand, further higher yields above 7% will bring in flows from them once RBI normalizes the policy.  

India’s monetary policy is likely to tighten in the coming months as RBI responds to sustained higher inflation and global tightening trend.  However, in its place the higher fiscal from the Government is expected to support the economy.

 Budget has assumed crude oil prices at 70-75 per barrel, which looks very optimistic.  As per current trends, oil is likely to be pegged at much higher level and that has negative implications for the trade and Current Account with attendant pressure on Rupee.  

Emphasis on growth in the budget will boost the corporate sector and possibly re-rate the earnings growth.  This is likely to bring back the FII investments in selected sectors.  Besides, long term growth prospects being cemented, will continue to attract direct investment in Indian corporate.   Disinvestment targets have been moderated, but there is likelihood of an outperformance.  However, globally tightening financial conditions will adversely affect the carry flows.  Thus USDINR is likely to move in range between 73.50 and 76.50 with Central Bank’s presence at extremes preventing undue volatility. 

The South African Rand kept up to its reputation as a high beta currency in the last quarter of 2022, with USDZAR moving almost 10% from high to low, while the comparable index of EM currencies moved only 6%.  This was the quarter when Dollar went through a sizeable correction to its 16 month rally, the trigger coming from the steady moderation in US inflation and the rate hike prospects being sized down by the market, though FED officials remained hawkish.  Investors took profit on their Dollar long positions and bought back bonds which had fallen substantially.  Even Global stock Index recovered as much as 18% despite recession fears in the background and here too the South African benchmark index outdid by rising by more than 23% from the lows.  

MACRO DEVELOPMENTS

TRADE SURPLUS of South Africa is estimated to fall far short of the robust one posted in 2021. Trade surplus for the 11 months to the end of November was R187.8-billion, less than half of the R402-billion recorded over the same period in 2021.   But the sizeable fall in oil price is already helping to arrest this trend.  In fact, Current Account Deficit as a percentage of GDP has slightly improved from -1.3% to -0.3% as a direct result of trade balance improving in November.   The balance of payment was affected by more capital flowing out than what came in.  

COMMODITY INFLUENCE: The oil price is losing its lustre in the face of a slowing global economy, and that may contain the price of major South African commodities such as platinum group metals and iron ore.  On the other hand, Gold may benefit from the fog of global economic uncertainty or emerging geopolitical flashpoints, but its importance to the South African economy and its export profile is a fraction of what it once was.  Should the global economy enter a deep recession in 2023 as expected by many analysts, the external performance and thus the Rand will be negatively affected.  

Non-economic factors have also worked to affect South Africa’s performance on the external front. 

LOGISTICS ISSUES: Transnet which is a fully owned South African Government organization operating as a corporate entity aimed at both supporting and contributing to the country’s freight logistics network continued to pose problems in achieving export performance with several strikes, inefficiency and corruption.  It is estimated that there was an export loss of SAR 50 billion on an annualised basis last year for iron ore, coal, chrome, ferrochrome and manganese exporters, as measured by delivered tonnages against contracted rail tonnages. This compares to a loss of R35 billion in 2021 based on the same metric. Attempts to reform the system have failed repeatedly.

POLITICAL BOTLENECKS: The current President Mr. Cyril Ramaphosa, who had succeeded Mr. Zuma who was forced to resign amid numerous charges of corruption, however faced his own scandal.  An independent report commissioned by the speaker of parliament said Mr Ramaphosa may have broken the law but he has denied any wrongdoing.  After facing impeachment proceedings, he managed to survive a vote in Parliament.  However, there are divisions within the party and his political future and hence the stability of politics in the country is under question.  Preoccupations with political survival have affected economic performance.  

DOMESTIC MACROS

On most parameters they performed better.  GDP for Q3 2023 improved to 1.6% from -0.7% and bettered expectations also.  Consumer Confidence rose from -20 to -8.  As already mentioned earlier CPI inflation also came down.  Manufacturing PMI rose to 50.6 from 49.5.  

INFLATION AND RATES: In line with the global trend, recent inflation in South Africa also declined slightly and the Central Bank is likely to keep the monetary policy unchanged for now.  From November 2021 to November 2022, they had raised its key repo rate by 350 basis points, bringing the prime lending rate to 10.5%.  However, major global Central Banks are still on rate hike path as their inflation rate remains far higher than the target, hence the funds flow might get affected.  

RECENT RAND MOVES AND OUTLOOK

Temporary resolution of political crisis, relative better performance on trade led by lower oil prices and also the fall in broader Dollar Index have helped Rand to perform better in the last two months.  However, the structural problems haunting the economy remain and will keep it from gaining much.  In fact, the latest fall in the Dollar Index has not seen Rand extend its gain much beyond 17.00 and has in fact weakened last week even as many EM currencies performed better.  

Prospects of recession in major countries are likely to affect its exports and will keep the currency subdued.  

TECHNICALLY, we continue to believe that the range of 16.50 to 18.00 will hold Rand moves at least in the first half of this year.  Only a further large slippage in the broader Dollar can see more gains for the South African currency, but even then we do not expect 15.50 to break without a vast fundamental shift in its external performance.  

SUPPORT LEVELS 16.60 AND 16.20

RESISTANCE LEVELS 17.30 AND 17.75