SinoUStalks,Powell'sspeechandRBI'sAnnualReport

The main headline globally today is about the Sino US trade talks where the officials have reaffirmed their commitment to the phase one trade deal. The expectation that the rhetoric which the Trump administration had pumped up against China in the recent days will end up derailing the trade discussion has somehow not materialized. The Chinese Yuan is trading at 6.90 which is its strongest level since January. The very fact that the managed peg has not been depreciated also gives an indication that the Chinese side is sticking to the unsaid promise of not using their currency as a tool of extracting unnatural benefits. Readers would remember that the primary grouse of the US side since time immemorial has been that the Chinese side has kept their currency at artificially depreciated levels hurting US exports.

The dollar index is trading at 93.10 levels, US Stock markets yesterday showed little movement and US yields have jumped up with 10 year trading at 0.72 currently. The next trigger point remains the speech by Jerome Powell during the digitized Jackson Hole conference which is due tomorrow. Analysts will be scouring for any hint on the future trajectory dubbing it as either dovish or hawkish. Powell’s speech will also be keenly watched for any comments on inflation. “Inflation targeting” was one phrase which the markets were looking for in the FOMC minutes too. The idea is that if the Fed goes for an “average inflation targeting” mandate it has to allow inflation to run above the policy marker of 2% for a considerable period of time so as to compensate for the low inflation levels in effect currently.  Powell’s speech is titled “ Monetary Policy Framework Review”. Writing about the Fed’s history of inflation targeting, one must remember the Volcker era where the interest rate was raised multiple times in quick succession to break the back of inflation. This was during the 1980’s era when the developed world was experiencing high inflation primarily starting with oil shock but also due to the break neck speed at which the productivity of the economy was increasing. 35 years down the road the problem has reversed on its head. Taking a motif from one of our favourite movies, The Unbreakable, Volcker and Powell stand at opposite ends of the spectrum like David Dunn (Bruce Willis) and Elijah Price (Samuel Jackson).

Domestically the main news was the cooling off in the bond yields yesterday post the announcement of Operation Twist yesterday to the tune of 20000 Cr INR where the RBI will be buying long term bonds and selling short term bonds. The GS 2030 5.79 is trading at 6.14 currently. The RBI Annual Report which got released yesterday promises to be a fine read condensing all that the RBI has done during the year in one place. The report gives details of how the income of the RBI was made. Key points are the total earning on FCA (foreign currency assets) which was INR 823.66 Bn, effectively at the yield of 2.65%. Earnings from domestic sources stood at INR Bn 673 Bn. Just to put these numbers in context, the first annual accounts for RBI were prepared in 1935, the surplus income in that year was only INR 56 lakhs (INR 5.6 Mn)!