IMF cuts India's GDP growth forecast for FY 22

Global developments

Chinese government's crackdown on big tech i.e. large consumer internet companies and Edutech companies has sent ripples of risk aversion across the globe. There are several reasons behind the crackdown; suppressing monopolistic behavior, ensuring alignment with Chinese government policies, ensuring data security, redirecting focus towards more meaningful and productive R&D and innovation are some of them. News of the first conviction under the newly enacted national security law in Hong Kong which makes it virtually impossible to freely express dissent against the government also added fuel to fire. There is speculation that the US could retaliate by restricting US funds from investing in shares of Chinese companies. The Hang Seng Index fell 4.2% yesterday. The Yuan fell to the lowest level since April. The US Dollar has weakened against majors as US real rates continue to remain under pressure. US equities were under pressure, tracking weakness in Asian equities. Technology stocks particularly are getting sold off. US treasuries are seeing safe-haven demand. The key event today would be the Fed monetary policy. We do not expect any major change in the wording or tone of the policy statement. The Fed is likely to continue to overlook inflation (terming it transitory) while focusing on recovery in the labor market.

Domestic developments

The IMF has revised India's growth forecast lower to 9.5% from 12.5%. The revision aligns IMF's forecast with that of RBI and major Rating agencies as well.

Equities

Equities came off during the session to end on a weak note, tracking weakness in Asian equities led by Hang Seng. Asian equities are trading flat. US equities did recover towards the end of the session yesterday.

Bonds

Bond yields were steady yesterday. The yield on the benchmark 10y ended at 6.17%. Rates ended slightly higher with 3y OIS ending at 4.67% and 5y at 5.20%.

USD/INR

Today is the July exchange-traded currency derivative expiry. We could see some selling at RBI fix. Month-end exporter selling is likely to cap upside in USD/INR. Forwards came off yesterday across the curve. 1y forward yield dropped 7bps to 4.43%

Strategy: Exporters are advised to cover a part of their near-term exposure on upticks toward 74.90. Importers are advised to cover through options. The 3M range for USDINR is 73.20 – 75.50 and the 6M range is 73.50 – 76.50.

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