Quick Summary
Indian Economic Update
RBI Governor said that growth is coming back on track as evidenced by an uptick seen in the higher frequency indicators from April 2022 onwards, ...while broad-based inflationary pressures remain a concern. He mentioned that inflation above 6% is negative for growth and RBI has started addressing the problem through rate hikes. Forex reserves are at 2.5 times of RBI's short-term foreign debt liabilities in terms of residual maturity and hence remain strong, he added

The finance ministry has argued against extending the free food ration scheme beyond September 2022 or making any major tax cuts, warning of consequences for the fiscal position in FY23

India’s MPC minutes show members emphasising the need to anchor inflation expectations. Though inflation is led by supply side factors, members were worried about the widespread build up. At the same time, growth is holding up. Most members feel India should move towards a positive real rate defined as policy rate, 1 year ahead inflation

India’s Current Account Deficit (CAD) decreased in Q4, FY22 to USD 13.4 billion (1.5% of GDP) from USD 22.2 billion (2.7%) in Q3, FY22 on the back of lower trade deficit and higher invisible receipts. In FY22, CAD increased to USD 38.7 billion (1.2% of GDP) as against a surplus of USD 24 billion in FY21 (0.9% of GDP) as trade deficit widened to USD 189.5 billion from 102.2 billion a year ago. Capital inflows inched up led by borrowings amidst FPI outflows

India’s import bill from Russia jumped 3.5 times in April to USD 2.3 billion, as per the data from the commerce ministry. In April, India’s crude oil imports were valued at USD 1.3 billion, 57% of India’s total inbound shipments from Russia

The Food Corporation of India will raise INR 500 billion as short-term loans from banks next monthfor financing its operations against expectations of INR 470 billion

Ministry of Finance, Government of India in its monthly economic review for May highlighted the re-emergence of the twin deficit problem in the economy, as higher commodity prices and rising subsidy burdens are leading to an increase in both fiscal deficit and Current Account deficit for the current fiscal year

After a gap of over eight years, India and the EU formally resumed negotiations for agreements on trade. This will provide greater market access for the domestic sector such as textiles, leather and sports goods in the EU market, Commerce and Industry Minister Piyush Goyal said

The Centre extended the PLI scheme for the Telecom sector by another year and has expanded the scope to cover design-led manufacturing. The scheme had been notified last February with an allocation of INR 121.9 billion. The Centre will provide additional incentives of over INR 40 billion under the amended scheme

RBI Governor Shaktikanta Das said the Central Bank has been targeting a soft landing for the economy when rising inflationary pressures have necessitated domestic monetary tightening. In countering the arguments of falling behind the curve, he said, early rate hikes could have been counterproductive for growth

India’s fiscal and monetary sides currently have spaces to be able to absorb a lot of shocks and the country can easily allow its large foreign exchange reserves to burn, if necessary, in order to cushion the system amid global hurdles, Sanjeev Sanyal, a member of Economic Advisory Council to the Prime Minister said.

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Global Update
On the second day of his semi-annual testimony to the House of Congress, the FOMC Chairman reiterated his commitment to bringing down inflation as ‘unconditional’. .... At the same time, FOMC Governor Michelle Bowman said she supports raising interest rates by 75 bps again in July and following that with a few more half-point hikes

Fed’s Powell in his testimony to the Senate Banking Committee on Wednesday said that US has to bring down high inflation to the 2% target. He accepted that steep rate increases could cause an economic contraction and called a soft landing “very challenging”

Chicago Federal Reserve Bank President Charles Evans on Wednesday signalled he would likely back another big interest rate hike in July, unless inflation data improves, saying the Fed's top priority is to "take the steam" out of price pressures

The European Union will temporarily shift back to coal to cope with dwindling Russian gas flows without derailing longer term climate goals, an EU official said on Wednesday as a tight gas market and soaring prices set off a race for alternative fuels

Media reports indicate that the US President Joe Biden will call on the Congress to enact a gasoline tax holiday in response to the recent surge in prices that has taken place

Fed Bank of Richmond President Thomas Barkin said the Central Bank should raise rates as fast as it can without causing undue harm to financial markets or the economy. He also stated that interest rate hikes of 50 bps or 75 bps seem reasonable

ECB policymakers continue to provide a hawkish guidance. The chief economist Lane stated that a 25 bps hike in July is likely but the rate size for September is still to be decided. Governing council member Kazimir stated that an exit from sub-zero interest rates in September is likely. Another member Rehn stated that there was a good reason to start raising interest rates from July onwards

Bank of England Chief Economist Huw Pill said policy makers would sacrifice growth to bring down inflation in the UK, saying there’s a risk of prices developing a “self-sustaining momentum.” He said, further tightening of the monetary policy will be needed

China’s COVID-19 outbreak is shifting to its south coast with a flare-up in Shenzhen triggering mass testing and a lockdown of some neighbourhoods

Reserve Bank of Australia Governor Philip Lowe reiterated that Australians should be prepared for further interest-rate increaseswhile emphasising that the future policy will be shaped by an incoming economic data

ECB President Christine Lagarde said that ECB intends to raise the key ECB interest rates by 25 bps in July and hike again in September

BoE’s Monetary Policy Committee Member Mann said that BoE needs to raise rates more aggressively to stave off a drop in the value of the pound that would drive up inflation

The FOMC Chairman Powell emphasised that the Central bank is acutely focussed on meeting its 2% inflation target and that the fight to restore price stability was ‘unconditional’. Other FOMC members continue to emphasise the need of front-load tightening. FOMC Governor Waller made a strong case for a 75 bps rate hike in July, reflecting economic data. However, FOMC member Mester stated that recession risks have risen on the back of sharp tightening in monetary policy that is expected

Treasury Secretary Janet Yellen said that “unacceptably high” prices are likely to stick with consumers through 2022 and that she expects the US economy to slow down

ECB member Olli Rehn stated that the Central Bank is focused on ensuring that the monetary policy transmission is equal across the Euro-zone, emphasising the need for a new tool that would keep the intra-European sovereign spread widening contained. His colleague Klass Knot stated that, several 50 bps rate hikes would be needed if the inflation outlook worsens.

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Benchmark indices are likely to open higher, tracking the sentiments in the global markets.Participants are expected to remain cautious given the prevailing market sentiment ...sentiment and uncertainties. Market volatility is expected to continue.

During the week Sensex gained 2.66% to close at 52727.98 while Nifty advanced 2.65% to close at 15699.25

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Government Bond prices are likely to open steady as market exercises caution, ahead of the weekly gilt auctions....

10Y benchmark yield ended at 7.44% as compared to 7.54% of previous week

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Brent Crude prices are trading flat as global growth concerns remain in place and as investors responded to comments from the FOMC Chairman that growth could ... slow down in 2023. Brent crude is currently trading at USD 109.68/bbl.

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Gold gave up initial gains and edged lower as the dollar regained momentum after U.S. Federal Reserve Chairman Jerome Powell doubled down on the Central bank’s policy tightening, aimed at taming inflation. Gold is currently trading at USD 1826.3/oz.
The USD/INR pair is likely to open lower as crude prices fall alongside the dollar index that rose, even though the ongoing global slowdown amidst monetary ...tightening continue to lend credence to the participants’ concerns. However, any sharp movement is unlikely in the pair due to expected RBI intervention. The Indian Rupee traded higher against the US dollar in the previous trading session moving to the 78.31 level.

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During the week Sensex gained 2.66% to close at 52727.98 while Nifty advanced 2.65% to close at 15699.25
Bond Yields
-10 bps
10Y benchmark yield ended at 7.44% as compared to 7.54% of previous week
Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and CRISIL.
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