Macro numbers surprised positively with sturdy growth (IIP), lower inflation (CPI) and reduced external risk (trade deficit). We are skeptical about extrapolating this happy occurrence, not least due to 2 clear tussles taking place that will add to market volatility.

Tussle 1: Trump administration fired its first protectionist salvo upon India by lodging a complaint against India’s USD 7bn export subsidy scheme with the WTO. The US believes India should have phased them out over the last 3yrs since it had crossed an income threshold in 2015. But, India believes it deserves the 8yrs exit window enjoyed by other EMs. This tussle draws US & India to the negotiating table as per WTO rules. No doubt the US will be pressing for reassessment of India’s import tariffs on Autos.

Fallout: India’s CAD could worsen.

Tussle 2: The central government’s FY19 public borrowing calendar will be issued soon. Typically, central government borrowing is front loaded and state borrowing is back loaded. This time around, there is real concern about how much PSUs can buy. They typically pick up ~30% of the issue, but with many PSUs under PCA there is concern about how much they can grow NDTL next year. While private banks will grow faster, they have higher risk appetite when deploying capital i.e. stick to SLR limits. RBI being the manager of the government’s debt issue may have to change strategy and issue less at the belly of the yield curve (where banks typically buy) and push more to the long-end (where insurance & pensions are more active).

Fallout: An unbending RBI could keep market yields elevated. Credit conditions could tighten. {We are not alone, the BIS believes that China, Canada and Hong Kong are at risk of a banking crisis which would imply policy action to tighten credit conditions}