Mizuho Daily – Overtake & Overturn | India’s Budget Cheer | RBA Hold

Mizuho Daily by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

The long shadow of Reddit Day-traders faded instigating rally on Wall St overtaken by vaccine good news; with US vaccinations overtaking infections; in stark contrast to Europe (ex-UK). And while US ISM data softened, it remains far more resilient, compared to the tumble in German retail sales. And those differentials may be poised to widen. That said, it is premature to declare that vaccinations overtaking infections will overturn the pandemic.

Nevertheless, US overtaking Europe on state of pandemic-vaccination, projected to economic outcomes has lifted USD (EUR slip to mid-1.20, AUD to 0.76, USD/JPY towards 105). But question is, whether USD momentarily overtaking will overturn a bearish USD trend.

In Myanmar, the military coup to overturn election results is watched closely. In particular, whether collective diplomatic action, with repercussions that overtake rhetoric.

India’s Budget Cheer

The good news is that India’s FY21/22 Budget is set to be emphatically expansionary and adequately supportive of an economy emerging from the pandemic blow; yet sufficiently on course for gradual fiscal consolidation not to be discarded. The planned budget deficit of 6.8% of GDP (for FY21/22) significantly reduces the gap from 9.5% deficit in FY20/21, but does not yank support away from where it is most needed.

What’s more, the ability to funnel more into development (health, education, infrastructure, etc) also sets India up for higher growth multipliers in a more durable fashion, and ultimately increasing growth potential/capacity.

Crucially, the plan for a “bad bank” to help unburden many of the public banks buckling under impaired assets (and subsequent capital inadequacy) will go a long way to bump up growth multipliers; helping public spending to snowball more effectively as private sector demand. But the risk is that a heavier interim debt burden and a longer road to fiscal consolidation/ alongside debt reduction may inadvertently arouse negative credit ratings action.

As we have emphasised, sufficient fiscal boost to avoid scarring is the overriding priority to restore growth potential/revenue feasibility; without which, fiscal rectitude will backfire.

RBA Hold: Front Loaded Stimulus & Subpar Inflation  

The RBA is set to be on hold; as it meant to be most of this year. Fact is, the RBA has front-loaded stimulus (erring on the generous side) of;

i. RBA policy (cash) rate at record low 0.10%;

ii. YCC (3Y) tagged to this rate;

iii. YCC buying not limited to the front end (flexiblity to buy further out the curve), and;

iv. AUD100bn (5% of GDP) QE committed over six months (expiring in April)

And this mean that the RBA may comfortably remain on cruise control for most of 2021 unless the wheel comes off the wagon unexpectedly.

What’s more, inflation remaining below 1%, but in-line with expectations validates the current policy course, and at least for an initial hold. Admittedly, there may be some reference to whether the RBA is inclined to extend the QE program that will be ending in April, and if so, by how much. But given the calibrated scale down in the pace of purchases, it is unlikely that QE will be accelerated.

Meanwhile AUD impact on the RBA may now be diminished given as recent AUD pullback mitigates the need to smooth “too much, too soon” gains. But the RBA could have an unintended impact in any case. Notably, the shortfall in the dovish quotient (vis-a-vis other G4 central banks) may bump up AUD.

Credit Source: Mizuho Bank Ltd