Central Bankers took center stage this week with MPC minutes of FOMC, RBI and ECB being keenly anticipated by markets. The FOMC was interpreted as being hawkish and portending 4 rate hikes this year (3 right now as per the dot plot). This halted steady USD weakness that was in vogue due to widening twin deficits in the US. In addition, the ECB noted that it could revisit its monetary policy “early this year” which prompted Euro strength.

Meanwhile, the RBIs minutes indicated that rate hikes were an eventuality if growth picked up sharply. India Gsec yields took this on the chin, continuing the sell-off on thin liquidity, which we believe benefit banks.

We see the 10yGsec settling at 7.5% post March as RBI OMO purchases, FII debt limit expansion and PSU bank buying brings in much needed liquidity and confidence into bond markets.Further, provided there is improvement in GST collections and steep downside surprises on inflation come through, yields could fall even more.

The USD/INR breached the 65 mark this week, in-line our longheld view of 65 by March 2018. We continue to see a depreciation bias for USD/INR and peg it at 66.5 by March 2019. While current movements are linked to the USD, India’s own worsening twin deficits situation could override the weaker USD narrative. The trade deficit monthly run rate is USD 3bn more than what it was 6 month ago, implying USD 36bn in ‘additional’ CAD on annual basis.

Equity markets are digesting higher yields and the positive aspect of a weaker Rupee. As we’ve noted in the previous edition, PEs are likely to compress on higher risk free rate outlook. Having said that, while the macro is worsening at the margin, micro-underpinnings, that we’ve been noting are beginning to bear fruit. A stock pickers market indeed.