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  • Emerging Markets Debt Daily

    India's Central Bank Surprise

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    December 05, 2019

    India’s central bank surprised the market by keeping all key rates on hold. South Africa posted another large current account deficit.

    India’s central bank (RBI) stayed on hold (unanimously), delivering the biggest policy surprise of the day. The consensus expected a 25bps rate cut, following a disappointing Q3 gross domestic product (GDP) print a few days ago. Still, the board decided that inflation was more important. This makes a lot of sense given inflation’s latest “growth spurt” and expected acceleration to 5.24% year-on-year in November (this will place it in the top quartile of the 4%±2% inflation target band). The central bank, however, made a big cut in its growth forecast for the financial year 2020 (from 6.1% to 5%) and maintained an accommodative stance, leaving the door open for further easing when the inflation outlook clears out. The government’s 2020 fiscal plan (to be released on February 1) would be another important consideration for the RBI.

    South Africa’s latest current account print confirmed that the economy is going through a rough patch. Even though there is no growth, the current account remained wide (3.7% of GDP in Q3) and the shortfall was larger than expected. The deteriorating income balance was the main culprit, and this structural issue might keep the overall balance deep underwater, despite robust commodity prices. One unfortunate macro implication is that South Africa’s twin deficits (a sum of fiscal and current account balances) are rapidly approaching 10% of GDP (see chart below)—one of the worst in emerging markets (EM) and a major factor that drags the currency down when markets turn.

    The quote of the day goes to the Russian Ministry of Finance which said that the local government bonds (OFZ) look overbought. It is a bit weird for a government to talk down its own debt, but here we go… One possible angle is that Russia wants to “diffuse” the situation before the next round of U.S. sanctions. Tuesday’s Senate hearing on policy towards Russia clearly showed that the threat of sanctions is still there, even though there are disagreements among U.S. policy-makers on how to proceed.

    Chart at a Glance: South Africa Financing Gap Is Widening at Alarming Pace

    South Africa Financing Gap Is Widening at Alarming Pace

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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