Gold prices may be moving up but gold ETFs are still seeing outflows in India. Gold ETFs registered Rs.570 crore outflows in 2018. The assets under management (AUM) of gold ETFs dropped by 6% during the year 2018. This marks the sixth consecutive year of outflows from gold ETFs. During 2018, equity funds saw inflows to the tune of Rs.1.27 trillion giving an indication of the asset shift. Of course, this was lower than the Rs.730 crore that moved out of gold ETFs in 2017, as per AMFI data. Normally, gold is inversely related to dollar strength and with the dollar being strong, gold has taken a hit.
There seems to be no let up in FPI selling, although the ferocity has come down sharply. Foreign Portfolio Investors (FPI) pulled out Rs.6000 crore till date in January 2019, substantially lower than the outflow of Rs.28,500 crore in October last year. Even the debt markets only saw a marginal inflow of just Rs.165 crore during the month indicating a risk-off trade among the FPIs. Normally, even in previous year, the FPIs have preferred to stay neutral to negative ahead of the Union Budget announcement. A better picture of flows may emerge once the Fed outlook is clearer.
Cabinet is likely to take decision on farm package during the week. According to a report in Business Standard, the Cabinet may be close to announcing a special farm package even before the interim budget on February 01st. One of the proposals in the package is interest waiver for farmers who repay loans on time, which is expected to cost Rs.15,000 crore. The Cabinet may also consider a direct cash transfer to farmers instead of subsidies. The government may look at the interim budget as a means to prop up the more vulnerable sections of the society.
With a huge spending program, it only logically follows that the borrowing calendar is likely to pressure Indian bonds ahead of budget. The RBI is expected to announce a borrowing program worth $90 billion for the coming fiscal according to a report in the Economic Times. According to the report, the big farm package was likely to put pressure on bond yields as government fiscal deficit was expected to overshoot the 3.3% mark by a margin. The fourth quarter was positive for bonds on falling yields. As the government gets more aggressive in borrowing, it could push yields higher and bond prices lower.
Finally, Donald Trump announced the end of the longest shutdown in US history. While the shutdown comes to an end, there may still be worries for the US. Donald Trump had triggered the shutdown after the Democrats had stalled the proposed Mexico Wall. However, officials have admitted that this was just a 3 week window and the pressure from contract workers was building up. While Federal employees were to be paid for the shutdown period, the millions of contract workers had been excluded. In fact, a chunk of the US government employees are on a contract basis and Trump has not approved any payouts to these contractors during this shutdown period. That was one of the factors that had also spooked the world markets and raised questions about US GDP growth.
When it comes to making the big shift to environment friendly fuels, Germany may be well in the lead. Germany is likely to phase out fossil fuels entirely by 2038 and will be the first big country to do so. Renewable sources already constitute nearly 40% of the total energy mix in Germany and it proposes to move to renewable energy in 20 years. In 2011, after the Fukushima disaster, Germany had stopped nuclear energy production altogether. Last year, renewable sources had overtaken coal for the first time. To begin with, coal capacity will halve by 2030 and then vanish by 2038.
