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RBI infuses liquidity through USD-INR swap

Speak of the Week 29.03.2019

RBI infuses liquidity through USD-INR swap

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Indian Economic Update

The Reserve Bank of India (RBI) on Tuesday infused INR 345.61 billion into the banking
system in exchange for Dollars, in its first Dollar-Rupee swap auction. In a statement,
the central bank said the auction received bids for USD 16.31 billion. Through the
auction, RBI bought dollars totalling USD 5.02 billion at a premium of INR 7.76.
After market hours on Wednesday, the RBI said the limit for Foreign Portfolio
Investment (FPI) investments in gilts would be raised by another 50 basis points to 6%
of outstanding stock for FY2020.

Global Update

US Gross Domestic Product (GDP) revised lower in Q4 2018 from 2.6% QoQ
Seasonally Adjusted Annual Rate (SAAR) to 2.2% QoQ SAAR as per final estimate.
UK MPs voted on eight possible options for a new Brexit strategy, including one
modelled on Norway’s relations to the European Union (EU) and another proposing a
new referendum, but rejected every one of them. The fresh parliamentary convulsions
followed Ms May’s announcement to a highly charged meeting of her Conservative
Party that she would make way for a new leader, if her colleagues dropped their
opposition to her Brexit deal and voted it through.
Global bond yields have fallen sharply after weak Purchasing Managers Index (PMI)
surveys released last Friday. US 3M-10Y yield curve inverted for the first time since
2007, igniting fears of a recession.

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Equity
Indian equities ended higher amid persistent foreign fund inflows and positive global leads.
Heavy short-covering on expiry of March series Futures and Options (F&O) contracts buoyed
investor sentiment.

During the week Sensex gained 1.33% to close at 38672.91 while Nifty advanced 1.46% to
close at 11623.9.

Debt
Government bond prices ended higher, amid fall in crude oil prices. Gains were capped due to
uncertainty surrounding the release of the government's borrowing plan for April-September.
Domestic bond market outlook looks favourable with benign global rates, lower inflation and
dovish tilt in monetary policy. However, supply concerns along with reduced prospects of open
market operations will keep markets cautious.

The 10Y benchmark yield ended at 7.34% as compared to the previous week’s close of
7.34%.

Oil
Oil prices touched yearly highs earlier in the week. Crude prices came under pressure after
the Energy Information Administration (EIA) reported a surprise build in crude inventories by
2.8 million barrels against expectations of a draw down for the week ending March 22, 2019.
However, a decline in gasoline and distillate inventories by around 3 million barrels and 2
million barrels limited the downside. Added pressures came from growing concerns around
global growth as equity markets witnessed a sell-off, moving away from risky assets such as
oil.

Gold
The yellow metal declined as the greenback appreciated, despite falling treasury yields and
growth concerns. Gold continues to hold above the USD 1300/oz threshold. However, it has
failed to gain traction in an environment supportive for the safe haven asset.
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Currency
The Rupee weakened against the US Dollar amid muted trade on dollar buys by importers.
Dollar sales by foreign banks, likely for FPIs supported the domestic currency at the margin.

Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and
CRISIL.

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