Thinkpad: Action And Inaction
Thinkpad: The week was all about RBI's inaction, SEBI's proposed action, Fed's feared action.
Happy Sunday.
It was a week of regulatory and central bank action and inaction.
The Reserve Bank of India stayed away from any change in the key policy rates or its monetary policy stance. It downplayed concerns on inflation and spoke of the need to remain “patient” and “persevere” in its support of a “strong, durable and inclusive recovery”.
That was the headline. Then it went ahead and made a move that left bond markets buzzing for the rest of the week. The debate was whether the RBI had, well, tricked the markets with the dovish narrative while actually tightening policy by stealth. You can read about that here.
If the RBI is tightening by stealth, we have questions. Will it work? More importantly, why? You can read our view here.
Even ahead of that tightening (or not), some banks have started to raise deposit rates and more may follow. In short, sans the dreary technicalities, the rate cycle has turned.
Attention shifted to the market regulator later in the week as it put out a consultation paper proposing to extend oversight of algorithmic trading to retail investors.
Concerns were raised that this could impact discount brokerages due to the wide definition of algo trading. “While SEBI’s intention is right, its decision to consider all API-based trades as algos can be bad for the entire ecosystem”, Nikhil Kamath, co-founder of India’s largest retail brokerage Zerodha said in a statement via his Twitter account. Given the surge in retail investor interest we have seen in direct equity investing over the last couple of years, this promises to be a thorny debate.
Meanwhile, incoming data on mutual funds remains encouraging with monthly inflows into systematic investment plans ticking up to Rs 11,000 crore in November. Now that's a habit that has really taken hold.
Elsewhere, global markets continue to tussle with concerns around Omicron, China, and the U.S. Federal Reserve.
In China, Evergrande finally defaulted but markets seem to shrug it off. It may not have been another ‘Lehman Moment’ after all but concerns about slower growth in the Chinese property markets persist. Perhaps to counter some of those concerns, the People's Bank of China cut the reserve ratio for its banks this week. The focus in China has clearly shifted to stability and growth, Bloomberg writes. China also raised the forex reserve requirement for banks, which many saw as a way to slow an appreciation in the yuan. Incidentally, the Indian rupee is at its weakest against the yuan, having slipped about 5% this year and about 12% since March 2020.
Against the U.S. dollar, the rupee fell to its weakest in 18 months this week. Nervousness ahead of an all-important U.S. Federal Reserve meeting, slowing foreign flows into emerging markets, outperformance earlier in the year due to IPO flows, and some rumblings about RBI downplaying inflation, took the currency down.
Come next week, all eyes will be on that Fed meet, which may have some surprises in store, particularly after another hot CPI reading.
We'll keep you posted. Till next week.