IBS TIMES 237th ISSUE

The RBI's Symphony

By:- Shelly Tibra & Shruti Bahadur

Tmarket sentiment.Additionally,the RBI's policy stance,whether dovish or hawkish, plays a crucial role in shaping investor sentiment. A dovish stance, indicating a likelihood of lower interest rates, tends to boost investor confidence and drive-up stock prices. Conversely, a hawkish stance, suggesting potential rate hikes, may lead to uncertainty in the market and trigger selling pressure.

he ReserveBankofIndia(RBI) plays a pivotal role in steering India's economic course through its monetary policy decisions, particularly concerning interest rates. When the RBI opts to lower interest rates, it essentially reduces the cost of borrowing for businesses, thereby enhancing their financial health and potentially boosting stock valuations. This scenario makes stocks a more attractive investment option compared to fixed-income assets like bonds, which typically offer lower returns in a low-interest-rate environment. Conversely, whenthe RBI decides toraise interest rates, borrowing costs for businesses increase, potentially denting corporate profitability and leading to a decline in stock prices. In such instances, investors may shift their focus towards fixed-incomesecurities in search of higher returns amidst rising interest rates.

Unravelling the Impact of Liquidity

The RBI employs various tools, such as Open Market Operations (OMOs), to manage liquidity within the financial system.

When liquidity is injected into the market through these measures, it results in an influx of funds, potentially driving up stock prices. Conversely, when the RBI tightens liquidity to combat inflationary pressures, it restricts the money supply, which could contribute to a decrease in stock prices

Sectoral Sensitivity to Interest Rates

Interest rate fluctuations have a pronounced effect on specific sectors of the economy, particularly those considered to be rate-sensitive, such as banking, automobiles, and real estate. Lowerinterest rates typically benefit these sectors,while higher rates can negatively impact their performance. Given their significant weightage in key stock market indices like the Nifty, the performance of these sectors significantly influences overall

As we delve into India's economic journey from 2019 to 2024 through graphical analysis, we observe a correlation between GDP growth trends and stock market performance. In 2019, robust GDP growth of 6.5% was mirrored by an upward trajectory in stock prices across most sectors.

Conversely, the economic slowdown induced by the COVID19 pandemic in 2020 led to a decline in stock prices. The subsequent economic rebound in 2022, marked by GDP growth soaring to 9.7%, coincided with a resurgence in stock prices, indicative ofrenewed investor confidence.

Looking ahead, as India's GDP growth remains steady in 2023 and 2024, we anticipate a continuation of the positive correlation between economic growth and stock market performance. However,it's essentialtoacknowledge that the stock market is influenced by various factors beyond GDP growth, including monetary policy decisions. The RBI's management of interest rates will continue to be a crucial factor in shaping stock market dynamics.

While graphical analysis provides valuable insights into the correlation between economic trends and stock market performance, a deeper understanding requires a comprehensive examination of specific data points. As we navigate the intricacies of India's financial landscape, guided by the winds of monetary policy and the currents of economic fortunes, we gain valuable insights into the dynamics shaping India's stock market journey.

The delicate dance of monetary policy sends ripples through the bond market

Cash

A higher Cash Reserve Ratio (CRR) tightens the grip on banks' lending power By requiring them to hold more reserves, the centralbank restrictsthe moneyavailable for loans. Thisscarcity can push banks to offer more attractive interest rates on deposits. As a result, investors seeking higher returns may turn to bonds, driving up bond yields - the effective interest earned ona bond. The impact might not be uniform across all bonds. A steeper yield curve could emerge, reflecting a sharper rise in short-term bond yields compared to long-term ones.

Statutory Liquidity Ratio

Higher SLR steers banks towards government bonds, potentially reducing demand and raising yields for corporate bonds. This is because banks have less money for other investments. Conversely, a lower SLR allows banks to invest more broadly, potentially lowering yields for non-government bonds. SLR mainly affects non-government bond yields.

Bank Rate

Rate hikes by the central bank make new bonds more attractive, causing existing bonds (especially long-term ones) to lose value. Investors might face losses if they sell before maturity. This isn't guaranteed though, as expectations and economic factors can influence the impact. Rising rates usually mean falling bond prices, while falling rates can lead to price increases.

Note- The term "bank rate" is no longer commonly used in India since 2016. The RBI replaced it with the repo rate as the key monetary policy tool.

Reverse Repo Rate

High reverse repo rates incentivize banks to park funds with the central bank, potentially tightening the money supply and raising loan costs. This might also nudge bond yields, especially for longer maturities, but the impact is usually milder than repo rate changes. The reverse repo rate acts more like a floor for short-term bond yields, with overall investor demand playing a bigger role in the broader bond market.

Open Market Operations

Central banks use open market operations to manage money supply. Bond purchases inject money, lowering borrowing costs and boosting bond prices. Bond sales tighten the money supply, raising borrowing costs and pushing bond prices down. In short, open market operations influence interest rates and bond markets by affecting money supply.

Impact

The past five years (2019-2024) showcased the RBI's toolkit for managing the bond market and INR exchange rate. CRR cuts in 2019 injected ₹1.35 lakh crore, reducing bond yields (10-year government bond from 7.3% to 5.8% by year-end). However, CRRhikes in 2022tocombat inflation(>6%)absorbedliquidity,

pushing yields up. The recent CRR reduction to 4.5% suggests a potential return to lower yields.

The SLR's impact was more subtle. A temporary reduction to 16% in 2020 freed up ₹1.2 lakh crore for lending but didn't significantly impact yields. RBI's strategic use of the reverse repo rate influenced the INR's attractiveness. With low inflation in 2019 (around 4%), the low rate encouraged lending and kept the INR stable (1.5% appreciation against USD).In2022,tocombat inflation(>6%),theRBIincreasedthe rate, making it attractive for banks to park funds, and tightening liquidity (1.2% INR appreciation by 2023).

Repo rate movements also impacted the bond market. OMOs by the RBI also significantly impacted the bond market. RBI purchases of government securities (G-Secs) in 2019 injected liquidity, pushing down bond yields (10-year yield from 7.3% to 5.8% by year-end). Conversely, RBI sales of G-Secs in 2022 absorbed liquidity, raising yields (10-year yield exceeding 7% again in mid-2023).

A shift in monetary policy reverberates through the Currency market, altering its dynamics and direction

Cash Reserve Ratio

Central banks use the Cash Reserve Ratio (CRR) to indirectly influence the currency market. A higher CRR reduces the money supply by limiting bank lending, which can push interest rates up. This attracts foreign investment and strengthens the currency. Conversely, a lower CRR loosens lending and potentially weakens the currency through lower interest rates. In essence, CRR controls money supply and interest rates, impacting the foreign exchange market.

Statutory Liquidity Ratio

Compared to CRR, SLR has a stronger grip on currency. It forces banks to hold more cash and bonds, limiting lending and potentially raising interest rates more. This can attract foreign investors and boost the currency. Lower SLR loosens lending, potentially weakening the currency. Inshort, SLR acts like a dial, adjusting liquidity, interest rates, andthe exchange rate.

Bank Rate and Repo Rate

Central banks use the bank rate to control borrowing costs. Higher rates make the domestic currency more appealing to foreign investors seeking better returns. The allure lies in the potential for higher yields, either from holding the currency or investing in interest-bearing assets denominated in that currency. As foreign investors flock to these opportunities, they buythe domesticcurrency, driving up demand. This surge inforeign investmentstrengthensthedomestic currency inthe foreign exchange market. In a nutshell, raising the bank rate attractsforeigninvestmentandbooststhe home currency. The term "bank rate" is often used interchangeably with the repo rate set by the central bank.

Open Market Operations

Central banks use open market operations (OMOs) to control money supply and interest rates, impacting the currency market. By buying government securities, they inject money, potentially lowering interest rates and weakening the domestic currency(less attractive toforeigninvestors). Conversely, selling securities tightens the money supply, potentially raising interest rates and attracting foreign investment (stronger

currency). While OMOs tend to weaken the currency with expansion and strengthen it with contraction, the overalleffect depends on the broader economic climate and actions of other central banks

Impact

RBI used a combination of tools to manage the INR exchange rate. A steady CRR of 4% in 2019 (inflation at 4%) corresponded with a strong INR (1.5% appreciation against USD). CRR hikes to 5% by 2022 (to fight inflation >6%) tightened liquidity, leading to a 1% INR appreciation by 2023. A temporary SLR reduction to 16% in 2020 increased lending but weakened the INR (3% depreciation against USD). In contrast,a steady SLRalongside reporate hikes in2023limited lending and rupee depreciation (0.5% INR appreciation by year-end). A repo rate cut to 5.15% in 2019 (inflation at 4%) boosted economic activity but depreciated the INR (2.5% against USD). Repo rate hikes totalling 2.25 percentage points in 2022 (to fight inflation >6%) strengthened the INR (1.8% appreciation against USD by 2023). OMOs: Large-scale government bond purchases by the RBI in 2019 (inflation around 3%) weakened the INR (2% depreciation against USD). Conversely, OMO sales in 2022 (to combat inflation >6%) strengthened the INR (0.7% appreciation by 2023).

The FED's Symphony

By- Avinash Kuma & Ronit Saraogi

The tools used by a central bank to control the country's money supply and boost economic activity are known as monetary policy. The Federal Open Market Committee(FOMC) is the Federal Reserve's main monetary policy-making body. The FOMC is responsible for monetary policy decisions, which can be divided into three categories: maximizing employment, stabilizing prices, and moderating long-term interest rates The goals of maximum employment and price stability, commonly known as the “dual mandate”, create the conditions for moderate long-term interest rates.

Monetary policy can be contractionaryorexpansionary. When the Fed contracts its monetary policy, interest rates increase making borrowing more expensive, this slows down economic activity and investment, potentially leading to lower stock prices andthemoneysupplybeing cut back.This is done tocurb inflation. Expansionary monetary policy occurs when interest rates are lowered, making it cheaper for businesses and consumers to borrow money. This extra cash fuels investment and spending, boosting stock prices and increasing demand for bonds, and the money supply opens up. If the Fed takes these steps, growth will increase when the economy slows down or during a recession.

Recent developments:

 The Fed aggressively raised interest rates by 5.25% points since March 2022. The rate hikes helped bring down inflation. It peaked at 9.1% in June 2022 but dropped to 3.2% by the time the Fed stopped raising rates in July 2023.

 The Fed is planning to cut rates three times in 2024 to help stimulate the economy. Each cut would likely be 0.25% points, bringing the total reduction to 0.75% by year-end.

 The Fed is currently shrinking its balance sheet to combat inflation by selling a lot of assets that it had bought during the pandemic to stimulate the economy, Reducing the speed of selling assets could help prevent another liquidity crisis, where there's not enough cash readily available in the financial system.

Impact on the Stock Market

The Fed has significantly raised interest rates since March 2022. This initially caused a 25% drop in the S&P 500; technology companies and consumer discretionary firms registered a significant loss of 30% and 38% respectively. At theend of 2022, stocks began to recover and generated a strong return in 2023, with the S&P 500 increasing more than 26%. In the first quarter of 2024, stocks continued the momentum, gaining more than 10%. Investors seem optimistic about the US economy's strength and positive corporate earnings.

The higher interest rate environment can mean different things todifferenttypesofcompanies.Wheninterestratesfirst moved higher in 2022, they took the largest toll on stocks with already high valuations, including growth-oriented technology stocks that prospered in a low-interest rate environment.

In 2023 as interest rate hikes it negatively impacts a different segment of the stock market, namely smaller stocks. For many smaller companies, the cost of funding at higher interest rates is a greater concern than for many larger companies, which have a greater amount of cash on hand and often issue longterm debt. As a result, after underperforming small-cap stocks in 2022, large-cap growth stocks far outpaced small-cap stocks in 2023 and started in the same advantageous position in 2024.

The Federal Reserve signalled they will cut interest rates three times in 2024. Investors reacted positively, pushing the S&P 500 index to a record high above 5,200. The tech-heavy Nasdaq 100 alsogained around 1%. The Fed is very focused on achieving its long-term inflation target of 2% (still below the current rate of 3.2%)

Impact on Bond Market

Central banks understand that they can impact asset prices by using monetary policy. They frequently employ this authority to temper fluctuations in the economy. In times of economic downturns, efforts are made to prevent deflation by reducing interest rates, causing asset prices to rise. Rising asset prices slightly boost the economy. A decrease in bond yields leads to reduced borrowing costs for companies and the government, resulting in higher levels of expenditure. Mortgage interest rates could decrease as the demand for housing is expected to rise.

Due to uncertainty surrounding the timeline of expected Federal Reserve (Fed) interest rate reductions, bond yields saw a slight increase formost ofthe yearwhile staying withina small range. At the beginning of April, the yields on the standard 10year U.S. Treasury note rose, increasing by 0.2% in just one day.

The 10-yearU.S. Treasury's yieldbeganthe yearat 3.88% before rising to 4.55% in early April. The most recent increase happened following a government report that revealed inflation reached 3.5% forthe 12months ending in March2024,

marking its highest point since September 2023. After peaking at 4.98% inOctober 2023, 10-year Treasury yields fellbelow 4%, but have since been gradually increasing with some minor fluctuations in 2024.

In 2024, the bond market remains volatile, as short-term bond yields surpass those of long-term bonds. The Federal Reserve is still considering lowering the federal funds target rate later this year, however, the latest inflation data could delay the timeline for the initiation of rate cuts.

The present bond yield situation developed following the Fed's increase of the federal funds rate in early 2022. From March 2022 to July 2023, the Federal Reserve increased interest rates eleven times, going from nearly 0% to reaching a maximum of 5.50%. Since that time, the Federal Reserve has maintained its stance on not raising rates further and has suggested that it will eventually start lowering rates in 2024, going against its previous approach.

Impact on Currency

Different monetary policy tools have different effects on currencies, but in general, when a policy tool is expansionary for the economy, it typically leads to a weakening of the currency, causing it to likely decrease in value against other currencies (assuming all other factors remain constant). This is due to two factors that work together harmoniously.

Firstly, the expansionary tool is being employed due to signs of economic slowdown or future potential slowdown, with worries from the central bank about growth falling below optimal levels. Reduced growth rates decrease the appeal of investing in the economy, causing the currency to depreciate against other currencies. Secondly, reduced potential interest rates in that country's economy are less appealing toinvestors,whichis anotherfactor contributing to the currency's depreciation.

Onthe other hand, when a policy is viewedas restrictive,it only has a beneficial effect on the currency, causing it to increase in value relative to other currencies (assuming all other factors remain constant). Once more, this is a result of two factors.

A tightening measure indicates a robust economy that could be at risk of overheating, but also underscores strong economic growth and appeal to investors, which is favourable for the currency. Rising interest rates also benefit investors, by further boosting the value of the currency. The effect can be summed up below.

Policy tool

Interest rate rise

Interest rate cut

Reduced quantitative easing

Contractionary Currency rises

Expansionary Currency falls

Contractionary

Currency rises

In early 2022, The Federal Reserve began signalling its intention to raise interest rates to combat rising inflation. In response to that, the market Anticipated higher rates, investors flocked towards US dollar-denominated assets (bonds, stocks) seeking better returns compared to other currencies. This increased demand for US dollars strengthened its value against other currencies.

There were majorly two major impacts that could be seen:

 A more powerful dollar resulted in cheaper imports for the US and pricier exports for foreign buyers. This has the potential to decrease American exports and economic growth.

 Countries with weaker currencies were especially affected by the strong dollar, as their monetary policy is looser or their economic growth is slower. This may result in increased import expenses for those nations, possibly causing inflation to rise.

The US dollar rally in 2022 shows how monetary policy choices can have a big effect on worldwide currency markets. The Fed can affect exchange rates and global trade by changing interest rates, which impacts the appeal of US dollar assets.

The UK’s Monetary Symphony

By-Arbas Ahmed, Sandeep Gangisetty & Pavan Kumar

The Bank of England (BoE) is the central bank of the United Kingdom and is responsible for framing monetary policy and promoting financial stability. The BoE's primary objectives include setting interest rates to achieve the government's inflation target, typically set at 2%, and regulating the financial system to ensure its stability.

The BoE's Monetary Policy Committee (MPC)meets regularly to assess economic conditions and set the Bank Rate, also known as the base rate, which influences borrowing and lending rates across the economy. At its meeting ending on 19 December 2018, the MPC voted unanimously to maintain the Bank Rate at 0.75%. On the other hand, on 20 March 2024, the MPC voted by a majority of 8–1 to maintain the Bank Rate at 5.25%

Impact on Stock Market

Bank of England recently emphasized the need for increased transparency in the global private equity sector, citing concerns that its private equity plays a significant role in providing funding to British businesses, particularly in technology and media sectors, amounting to around £250 billion. However, recent market developments, including rising interest rates and challenges in exiting investments, have raised concerns about potential disruptions and systemic risks. The Bank of England is closely examining these issues and considering regulatory changes after conducting thorough assessments. The British Private Equity and Venture Capital Association emphasized the sector's contribution to economic growth, generating £137 billion in 2023, and highlighted its resilience across economic cycles.

The above graph shows the Total return (%) in the UK Equity market of the last years i.e. 2020-2024. FTSE 100 index is considered and it can be observed that returns have fallen in years 2020-2021. This was due to adverse changes in the global economy and the COVID-19 pandemic. In response to the economic downturn caused by the COVID-19 pandemic, the Bank of England (BoE) implemented measures to stimulate economic activity, including lowering bank rates to 0.1% in 2020-2021. As the economy began to recover and inflationary concerns emerged, the BoE gradually raised bank rates. By 2021-2022, rates had increased from 0.1% to 3.5%, indicating a shift towards a tighter monetary policy stance aimed at curbing inflation.

Subsequent years witnessed further adjustments in bank rates, with rates ranging from 3.5% to 5.25% in 2023 and 2024. These

monetary policy changes played a crucial role in stabilizing the economy, managing inflationary pressures, and bolstering investor confidence in the UK stock market. Higher bank rates are generally associated with improved returns for investors, reflecting a healthier economy and reduced inflation risks.

Impact on Bond Market

The Bank of England (BoE) began proactive monetary easing after the 2008 global financial crisis. This method required historically low interest rates and large-scale asset acquisitions through quantitative easing (QE). This conciliatory stance was takentoreduce deflation,boost economic activity, andsupport asset values.

In late 2017, a series of interest rate hikes began to normalize monetary policy following a period of unusually loose policies. This shift was clear after interest rate hikes.

Analysing how policy changes affect bond yields and prices helps explain monetary policy and the bond market. Last five years in the UK:

1. Interest Rates and Yield Curve Dynamics: Bank of England rate hikes raise short-term bond yields, affecting the yield curve. Rate rises have raised short-term yields since 2017, impacting investors and debtors in longer-term bonds.

2 Quantitative Easing (QE): The BoE lowers bond yields by increasing liquidity. As QE tapered, bond prices and yields changed. Initial rounds calmed markets.

3. Inflation Expectations and Real Rates: BoE communication affects nominal bond rates and real returns. Targets and policy revisions affect inflation expectations and bond market dynamics. Bond yields change with inflation and policy signals.

Understanding these factors helps investors and regulators predict bond market movements after monetary policy changes.

We consider changes in bond yield to examine the impact of monetary policy on the bond market. Here a government bond and corporate bond of the United Kingdom have been taken.

BOND YIELD: 10Y Government bond

Between 2017 and 2018, UK 10-year bond yields remained steady at 1% to1.5%,signalling aperiod of economicandpolicy stability. However, following Brexit and the COVID-19 pandemic, the Bank of England (BoE) implemented supportive monetary policies, causing yields to plummet from 1.5% to 0.2% between 2018 and 2020. Subsequently, as part of efforts toaddress inflationary pressures,the BoEbeganraising interest rates. From early 2021 to March 2023, rates climbed from 0.7% to 4%. These periodic rate hikes were aimed at curbing excessive inflation.

In response to the BoE's tightening of monetary policy, UK 10year bond yields stabilized around 4% in 2023–2024. The fluctuations inUK 10-year bondyields overthe past sevenyears reflect the impact of BoE's monetary policy actions on the bond market, investor behaviour, and broader economic conditions. Corporate bond - Lloyds Bank PLC 5.125% Perpetual AT1 Bond

The Lloyds Bank perpetual AT1 bond fell from 100 to 50 in 2020 due to COVID-19 market fears. The bond price returned to 130 by January 2021, likely due to the Bank of England's financial sectorstabilizationefforts. Due tomarket anxiety regarding the economy and the bank's financial soundness, the bond price ranged from 80 to 140 in 2021–2022. As the Bank of England raised interest rates and halted asset purchase programs, the bond price fell from 110 to 60 in 2022–2023. The bond price steadied and recovered to 80 in 2023–2024 due to market response to shifting interest rates and Lloyds Bank's improved financial health. These price changes show that the Lloyds Bank perpetual AT1 bond is sensitive to monetary policy, economic conditions, and investor mood, emphasizing the importance of issuer stability and market dynamics for investors.

Impact on Currency

The dominant subject of 2019 and early 2020 became undoubtedly Brexit. The extended negotiations and eventual withdrawal from the European Union in January 2020 prompted giant uncertainty. This translated right into a depreciation of the Pound, as investors were concerned about the impact on trade and the United Kingdom's economic system.

The arrival of the COVID-19 pandemic in 2020 to start with sent the Pound tumbling further. Global risk aversion and financial lockdowns triggered a flight to protection, pushing investors in the direction of more potent currencies. However, the Bank of England's fast intervention with quantitative easing measures helped stabilize the Pound. As economies commenced to get better in 2021, the Pound experienced a brief-lived rally, reflecting renewed optimism.

The latter half of 2022 saw a renewed depreciation of the Pound. The Russia-Ukraine battle and subsequent energy crisis introduced inflationary pressures already present in the worldwide economy. The Bank of England spoke back with a chain of interest charge hikes, aimed at curbing inflation. This, however, made the Pound much less appealing to a few foreign investors, leading to a decline in its price.

The connection between forex fluctuations and the capital market is multifaceted. A weaker Pound could make UK exports less expensive, probably boosting enterprise profits and inventory costs. However,it canadditionally cause rising import costs, which may squeeze company margins and dampen investor sentiment. Additionally, an unstable Pound creates uncertainty for businesses, hindering funding decisions.

The beyond 5 years were a length of great volatility for the Pound, impacting the UK capital marketplace in various approaches. As the world grapples with geopolitical tensions and economic demanding situations, navigating this interconnectedness between foreign money and capital market will be vital for investors and policymakers.

Conclusion

UK monetary policy has impacted the bond market for five years. The BoE's interest rate adjustments and QE programs have affected the bond market, which had major ramifications for investors. Given the ever-changing UK economy, policymakers, market participants, and investors will closely follow monetary policy and the bond, Stock market, and currency of the UK.

The Japan’s Monetary Symphony

By- Anshul Pradhan & Abhishek Bommasamudram

The Bank of Japan (BOJ) has been ina relentless battle against deflation, a persistent price decline, for over two decades. The past five years (2019-2024) have been no different, with the BOJ employing a toolbox of unconventional measures to stimulate economic growth and achieve its inflation target of 2%.

Japan's central bank, the BOJ, has been fighting deflation (falling prices) for decades with unconventional policies. They keep interest rates near zero and buy massive amounts of bonds to pump money into the economy. This encourages borrowing and spending. However, inflation has stayed low. Some blame demographics, while others worry the BOJ's actions might destabilize the financial system or hurt banks' profits.

Recently,globalfactors pushedinflationabove 1% inJapan. The BOJis cautiously optimistic but faces a balancing act. Ifinflation keeps rising, they might need to tighten policy, which could slow economic growth. The long-term success of this approach is unclear. The BOJ must tread carefully, watching inflation and adjusting its strategy as needed. Exiting ultra-low rates while maintaining stability and growth will be a major challenge.

Impact on Stock Market

Japan's monetary policy, characterized by its aggressive quantitative easing (QE) measures and negative interest rates, has had a profound impact on the country's stock market dynamics from 2019 to 2024. Initially, the Bank of Japan (BoJ) continued its massive asset purchase program, injecting liquidity into the financial system to combat deflationary pressures and stimulate economic growth.

This flood of liquidity contributed to a surge in stock prices, as investors sought higher returns in equities due to dismal yields on bonds and other fixed-income securities. Consequently, from 2019 to early 2020, Japan's stock market experienced a notable rally, with major indices like the Nikkei 225 and TOPIX reaching multi-year highs.

However, the outbreak of the COVID-19 pandemic in 2020 triggered a sharp correction in global markets, including Japan's. Despite the BoJ's efforts to stabilize financial markets through additional monetary easing and asset purchases, investor sentiment remained fragile amidst economic uncertainty and lockdown measures. Consequently, Japan's stock market witnessed heightened volatility throughout 2020, with sporadic sell-offs followed by short-lived rebounds. As the pandemic persisted, the BoJ intensified its monetary stimulus, expanding its asset purchase program and implementing yield curve control (YCC) to cap long-term interest rates. These measures aimed to provide stability to financial markets and support the economy through the crisis.

Consequently, Japan's stock market gradually recovered from its pandemic-induced lows, albeit with occasional setbacks driven by concerns over virus variants, economic data, and global geopolitical tensions. Moreover, the prolonged ultraloose monetary policy environment led to a search for yield among investors, driving up demand for equities and contributing to the stock market's resilience. However, this dependency on central bank support also raised concerns about asset price inflation and the sustainability of market valuations. Looking ahead, the effectiveness of Japan's monetary policy in sustaining the stock market rally remains contingent on various factors, including the pace of economic recovery, inflation dynamics, and central bank policy decisions. Any indication of policy normalization or unexpected shifts in global economic conditions could potentially impact investor sentiment and market dynamics. In summary, Japan's monetary policy, characterized by QE measures and negative interest rates, has been instrumental in influencing the country's stock market performance from 2019 to 2024. While providing essentialliquidity support andstability during periods of uncertainty, it has also contributed to heightened volatility and raised questions about the sustainability of market valuations in the long run.

Impact on Bond Market

The Bank of Japan's (BOJ) ultra-loose monetary policy has profoundly impacted the Japanese bond market over the past five years. Let's delve deeper into the specific actions and their consequences:

Monetary Policy Actions:

 Zero Interest Rate Policy (ZIRP): The BOJ maintained short-term interest rates near 0%, making it unattractive to hold Japanese government bonds (JGBs) for yield.

 Yield Curve Control (YCC): The BOJ implemented YCC, targeting a specific band (usually around 0%) for the yield on 10-year JGBs. This involved actively buying JGBs to suppress yields and keep them within the target range.

Impact on Bond Yields: YCC effectively capped JGB yields across the maturity spectrum, driving them down tohistorically low levels. Investors seeking higher returns were forced to look elsewhere, further dampening demand for JGBs. While shortterm rates remained near 0%, the BOJ allowed some flexibility for yields on longer-term bonds. This resulted in a steeper yield curve,with a largerspread betweenshort- and long-termrates.

Impact on Bond Market Dynamics: The BOJ's aggressive buying program significantly reduced the number of JGBs available in the market, decreasing liquidity. This made price fluctuations more significant for remaining bonds. Traditional JGB investors, like pension funds seeking stable returns, faced unattractive yields. This led to a shift towards foreign investors seeking a safe haven asset with a slight positive yield compared to negative rates elsewhere.

Overall Consequences: The government enjoyed significantly lower borrowing costs due to suppressed JGB yields. This helpedfinance fiscalstimulus programs. Despite the easy monetary policy, inflation remained stubbornly below the BOJ's 2% target. With JGBs offering low returns, investors sought riskier assets like domestic stocks and foreign bonds, potentially inflating asset bubbles in other markets.

Looking Ahead: The BOJ faces the delicate task of normalizing monetary policy without triggering a sharp rise in JGB yields, which could derail the economic recovery and increase government borrowing costs. The path to normalizing YCC and raising interest rates remains unclear, with potential risks of financial market instability.

Additional Considerations: Global economic conditions and monetary policy actions by other major central banks will also influence the Japanese bond market and the BOJ's decisions. The long-term sustainability of the BOJ's ultra-loose monetary policy is debatable, with potential risks of distortions in the financial system and difficulty in achieving the desired inflation target.

Impact on Currency and Exchange Rate

Japan's financial development remains a basic cash within the worldwide monetary markets. The Bank of Japan's moneyrelated arrangement altogether impacts the yen's esteem on the forex showcase. Intercessions, whether through quantitative facilitating or coordinated advertising activities to check yen quality, are closely observed by dealers for their prompt and long-term impacts on money valuation. Japan's financial arrangement, set by the Bank of Japan (BoJ), plays a vital part. Measures such as intrigue rate alterations, quantitative facilitating, and cash mediation can essentially affect the yen's quality. For occurrence, lower intrigue rates or expanded cash supply ordinarily debilitate the yen, making Japanese trades more competitive.

For Forex dealers, we think the BOJ may investigate the plausibility of an approach change most likely rejecting the YCC arrangement while keeping NIRP should the yen head

back toward the 150 level. Such a step would likely cap the yen at around 150 and increment the potential for it to rally back toward 130. It is as of now floating around 140.

A conclusion to YCC would moreover likely result in a quick repricing in Japanese government bonds, with 10-year yields possibly multiplying from current levels of generally 0.4% to levels drawing nearer 0.8%. With the yen solidly within the driver's situate of Japan's financial approach, the BOJ must explore carefully to attain its objectives. Speculators who heed the street signs may be best situated to require advantage of openings as they emerge. understanding the yen's conduct includes observing Japan's financial pointers, worldwide advertising assumptions, and geopolitical improvements. Fruitful exchanging procedures regularly combine specialized investigation of yen cost developments with a crucial examination of variables likely to impact its esteem. The yen's part as a foundation of the worldwide economy and key money in Forex exchanging remains unchallenged in 2024.

China's Market Moves: PBOC's Toolbelt Revealed

By- Yuvraj Dutt Sharma & Nehal Garg

China’s monetary policy stance is different from that ofmany advancedeconomies.Whileprice stabilityis asharedgoal,and economic growth is also a shared goal, China focuses on financial stability, as well as the exchange rate management of its renminbi currency. This is due to China’s unique economic structure and the country’s emphasis on social stability

The People's Bank of China (PBOC): The PBOC is China’s central bank, responsible for setting and executing monetary policy. It is the government’s financial representative and plays an essential role in safeguarding the stability of China’s financial system

The Three-Pronged Approach: Objectives of China's Monetary Policy

 PriceStability: The primary objective ofthe People's Bank of China (PBOC) is to contain inflation to prevent the renminbi from depreciating and safeguard Chinese people's purchasing power. This stability provides a stable economic environment for companies and consumers.

 Economic Growth: The People’s Bank of China (PBOC) uses a variety of levers to boost economic growth and long-term development. A booming economy means more jobs, better quality of life, and a stronger government revenue base.

 Financial Stability: The primary goal of a sound financial system is to manage risks and avoid financial crises. This includes making sure banks have enough capital, keeping an eye on potential systemic threats, and avoiding excessive debt

In the world of finance, few relationships are as intricate and consequential as the interplay between monetary policy, bond markets, and currency dynamics. Nowhere is this more apparent than in China, where the People's Bank of China (PBOC) decisions set off a complex chain reaction that reverberates through global markets. Let's embark on a journey to unravel the technical representations of this symbiotic relationship.

China's Monetary Policy and the Bond

Market:

China's monetary policy, orchestrated by the PBOC, holds sway over the bond market, influencing key indicators such as interest rates and yields

Interest Rate Dynamics: When the PBOC adjusts interest rates, it sets the stage for changes in bond yields. For instance, a rate hike leads to higher yields, while rate cuts have the opposite effect.

YieldCurveVariations: Alterations inmonetary policy affect the shape of the yield curve, signalling shifts in market expectations. Tightening policies may flatten or invert the curve, while easing measures tend to steepen it.

Credit Spread Fluctuations: Changes in monetary policy impact credit spreads, reflecting investors' perception of risk. Tighter policy may widen spreads, while looser policy can narrow them.

Liquidity Influence: The PBOC's liquidity operations play a crucial role in shaping market liquidity, influencing bond yields and market volatility.

Technical Representation:

Interest Rate Adjustment: PBOC raises rates by 0.25%, causing 10-year bond yields to climb from 3.00% to 3.25%.

Yield Curve Shift: A dovish stance from the PBOC leads to a steeper yield curve, with short-term rates falling relative to long-term rates.

Credit Spread Widening: Corporate spreads widen from 1.50% to 1.75% amid signs of tightening monetary policy.

Liquidity Impact: Tightened liquidity conditions contribute to higher bond yields and increased market volatility.

A Note on China's Approach: China’s monetary policy architecture is still developing. While the importance of interest rates is increasing, the People’s Bank of China (PBOC) still largely relies on quantitative instruments such as the Reserve Capital Requirement (RRR) and open market operations (OMOs). This reflects the continuous evolution of China’s financial markets, and the need to balance financial stability with traditional objectives such as price stability and economic growth.

 Liquidity Injections (e.g., Buying Bonds): When open market operations (OMOs) are conducted by the People's Bank of China (PBOC) to buy bonds, it boosts the money supply, making stocks more appealing to investors and potentially driving up prices as more money is available to invest.

 Liquidity Tightening (e.g., Selling Bonds): On the other hand, when the People's Bank of China (PBOC) sells bonds, it drains liquidity from the system. This can potentially make stocks less attractive to investors.

China's Monetary Policy and Currency Dynamics:

Changes in China's monetary policy exert a significant influence on currency markets, affecting exchange rates and investor sentiment:

Interest Rate Differentials: Variations in interest rate differentials between China and other countries impact currency values. Higher rates attract capital inflows, bolstering the currency, while lower rates may lead to depreciation.

Sentiment Impact: Alterations in monetary policy shape investor sentiment toward the yuan, influencing speculative flows and currency volatility.

Export Implications: A weaker yuan resulting from easing monetary policy may enhance China's export competitiveness but could also spur inflationary pressures.

In the realm of finance, the interplay between monetary policy and currency markets holds profound implications. China's monetary policy decisions,orchestratedby the People's Bank of China (PBOC), wield significant influence over the value of the yuan and global currency dynamics. Let's dissect this relationship through a technical lens.

Consider a scenario where the PBOC implements an interest rate cut of 0.50%, signalling an expansionary monetary stance. In response, the yuan depreciates against major currencies like the US dollar, reflecting increased exchange rates such as USD/CNY rising from 6.50 to 6.60.

Investor sentiment towards the yuan weakens, precipitating speculative selling and capital outflows. However, this depreciation enhances China's export competitiveness, stimulating economic growth. Yet, imported inflation becomes a concern as the cost of foreign goods rises.

The PBOC may intervene in the foreign exchange market to manage currency volatility. Nevertheless, the intricate interconnections of global finance ensure that the impact of China's monetary policy resonates far beyond its borders, shaping investment patterns and economic trajectories worldwide.

Technical Representation:

Interest Rate Cut: PBOC reduces rates by 0.50%, leading to yuan depreciation against the US dollar (USD/CNY rises from 6.50 to 6.60).

Sentiment Shift: Investor sentiment weakens, triggering speculative selling and capital outflows.

Export Boost: Yuan depreciation enhances export competitiveness, fostering economic growth.

Impact on Stock Market

China's monetary policy can significantly influence its stock market, but the impact can be complex and depends on the specific tools used and market expectations. Here's a breakdown of the key channels:

 Interest Rates: Lowering interest rates (like the benchmark lending rate) generally makes borrowing cheaper, potentially increasing investment in stocks. Conversely, raising rates can have a cooling effect.

 Reserve Ratio Requirement (RRR): Reducing the RRR releases more money into the banking system, potentially boosting stock market liquidity and investor confidence. Raising the RRR tightens liquidity, which could dampen stock prices.

 Open Market Operations: The People's Bank of China (PBC) can inject or drain liquidity through tools like open market operations. Increasing liquidity can support stock prices while reducing it can have the opposite effect.

Important Considerations:

Market Expectations: The impact of monetary policy changes often hinges on whether they meet or exceed market expectations. An unexpected easing can significantly boost stocks, while a less aggressive move than anticipated might disappoint investors.

Government Intervention: China's government can exert a strong influence on the stock market through state-owned enterprises and other measures. This can sometimes dampen the pure impact of monetary policy.

Financial System Structure: China's financial system relies more on bank lending than developed economies. This can make the transmission of monetary policy to the stock market less direct.

Expansionary and Contractionary Economic Activity and the Canadian Capital Market

By- Divisha Arora & Darji Daksh Kapil

The Bank of Canada plays an important role in maintaining a healthy Canadian economy. Their main tool is to control inflation, ideally by keeping it at a fixed 2%.

This stable inflation allows people to plan for the future without worrying about unexpected price changes. Companies can invest with greater confidence knowing that prices will not change dramatically. This recovery improves overall business and financial health. The Bank of Canada uses interest rates to control inflation. Ifprices falltoo low, interest rates are reduced. This makes credit easier and encourages people and businesses to spend more. This increase in spending stimulates the economy and pushes prices above target. Conversely, when inflation is too high, interest rates are raised. Borrowing gets more expensive and spending slows, which cools the economy and drives up inflation.

However,it isnot anexact science.Itistoolatetoadjustinterest rates to see the impact of inflation. The bank should act like a sophisticated economist, forecasting future economic trends andadjusting interest rates accordingly. External factors suchas global events or oil prices can also affect commodity prices, making their job more difficult.

Impact on Stock Market & Bond Market

Ultimately, the Bank of Canada seeks to achieve a strong and prosperous Canada. By controlling interest rates, it aims to achieve low unemployment, sustainable growth, and predictable prices for all. The Bank of Canada’s monetary policy decisions act like a guide rod, shaping not only the entire economy but also the workings of the capital market Here’s an in-depth look at the key links:

 Interest rate and cost of capital: One of the most important impacts is the impact on the cost of capital for businesses. Low interest rates promoted by the bank make it easier to borrow. This gives companies more financial fuel for expansion, mergers, and stock buybacks. Increased economic activity and potentially higher returns in the future could translate into a more attractive portfolio. Conversely, higher interest rates make credit more expensive, slowing corporate growth and putting pressure on share prices.

The following diagram shows the impact of interest rates on the stock market. The line in blue is the interest rate and the grey line is the Canadian indices It is visible that till the year 2020 both the interest rate and the Canadian index were at the growth stage, but post covid it impacted negatively. Both interest rates as well as the indices showed a downward trend, eventually interest rate was constant for almost 2 years, but the indices recovered. But before 2023 the interest rates also

showed an upward trend. The chart also proves that since 2020 when the interest rate was low companies were in expansion.

Impact of Interest rate on Canadian indices

 Stocks vs. Stocks Attractive bonds: Interest rates also play a role in the relative attractiveness of stocks and bonds. When interest rates are low, the returns on investments that were safer,suchas government bonds, are less attractive. This allows investors seeking higher returns to focus on the stock market. This increased demand from investors can drive stock prices higher. Think of this as a game of musical chairs – when music (low interest rates) stops in bonds, investors scramble for the remaining seats (stocks), which can drive their prices higher

 Economic performance and market performance: The Bank thrives in a healthy and growing economy. If the bank implements policies that encourage economic activity, such as lowering interest rates, it can create a strong corporate environment with increased profitability This improved profitability can lead to firms that are valuable in the eyes of investors, and can lead to greater stock appreciation. Conversely, if the central bank raises rates to curb inflation, it could slow economic growth, potentially dampening corporate profits and bank performance.

Investor mindset and market sentiment: Investment decisions can also play mind games with investors. If the bank raises interest rates to fight inflation, it could signal concerns about future economic conditions. This could make investors more cautious and they could sell stocks out of fear of a market downturn. On the other hand, the bank’s dovish nature, by keeping rates down over a long period, can inspire investor confidence by showing confidence in a strong economy. This prospect can encourage buying at the stock market, driving up prices.

It is important to remember that the relationship between monetary policy and banks is not always linear. Geopolitical events, industry-specific news, and investor sentiment can all play a role. But understanding these relationships can be a valuable resource for investors and anyone interested in the complex interactions between monetary policy and financial markets

The Bank of Canada acts as Canada’s monetary strategist, using two main tools to influence its rhythm: interest rates and quantitative easing (QE) Interest rates are a well-known tool, and they work like a bait call exchange credit cost. Reducing target rates overnight makes borrowing easier, encouraging businesses to save and consumers to spend less. This additional spending stimulates economic activity but risks inflation. Conversely, higher interest rates make borrowing more expensive, slowing spending and acting as a brake on inflation.

The Treasury uses interest rates to keep inflation around the 2% target, making things more expensive for Canadians.

Quantitative easing (QE) is a relatively new and unconventional tool in times of financial crisis. Imagine the Bank of Canada "printing money" electronically. Government bonds and other financial assets are bought from banks, and new money is injectedintothe system.Thishas limitedimpact.First,itunfairly lowers interest rates. By purchasing this asset, the bank increases its price and reduces its yield (interest income). This decline in bond yields reduces other interest rates in the economy, leading to weaker borrowing and higher debt. Second, having more cash on hand than selling assets to a bank allows regulated banks to lend independently. This further increases the money supply and contributes to the flow of credit throughout the economy.

The Quantitative easing done by Canada in intensity since 2019

Compared to interest rates, however,QEis a disappointing tool. It is usually used when interest rates are already close to zero and further reductions will have little impact. It’s like stepping on the gas pedal when the engine is already maxed out. The Bank of Canada wants interest rates to be flat, but QE provides additional pressure when needed.

The Bank of Canada uses twomain tools toinfluence the rate of borrowing and the ease of access to credit. Interest rates work like a direct dial - lowering them makes borrowing easier and lending easier, but risks a financial crisis. Conversely, inflation makes borrowing more expensive and borrowing harder, raising prices but potentially causing a recession. Quantitative easing (QE) is a more indirect tool. By buying bonds, the bank pushes down borrowing costs and encourages banks to lend for free, but compared to interest rates, it’s a disappointing tool. Ultimately, the bank aims for a balanced approach: keeping borrowing costs reasonable, and creditworthy, and keeping prices high to keep the Canadian economy healthy.

Finally,the Bank ofCanada attempts a delicate balance. Interest rates and QE are used to keep the economic engine running smoothly. By controlling inflation and influencing borrowing costs, they aim to create an environment where businesses can invest, create jobs, and consumers feel confident that they are owed money will play a role This is a difficult task, but one that is critical to ensuring the health and prosperity of the Canadian economy.

Impact on the Currency

The Canadian monetary system is run by the Bank of Canada (BoC) and is heavily influenced by the Canadian dollar (CAD). The BoC uses interest rates as a weapon to control inflation. Rate hikes make borrowing more expensive, aimed at cooling the economy but also attracting foreign investors looking for better returns on Canadian investments. This increased

demand strengthens CAD. In contrast, discounting stimulates the economy but weakens the currency by making investing less attractive.

In the below figure, there is a basic comparison between interest rates in Canada for the past 10 years and the value of the US Dollar in Canada. On the X-axis we can observe the years and on the left side of the graph, we can see parameters for interest rate which is in the blue line. On the right side, we have a parameter for the value of USD in Canada.

Comparison of Interest rate and Currency value

These exchange dances are commercialized. A strong CAD benefits buyers with low-cost imports but hurts exporters whose products are expensive for foreign buyers. Weaker CAD boosts exports but squeezes consumers with expensive imports. The BoC walks a tightrope, balancing inflation, economic growth, and overall healthy economic volatility. While interest rates are an important factor, global economic conditions and foreign interest rates also play a role in determining CAD pricing.

In conclusion, the Bank of Canada plays an important role in maintaining a healthy Canadian economy. Their primary instrument, interest rates, and quantitative easing affect borrowing costs, inflation, and the strength of the Canadian dollar. The bank strives for a flexible balance sheet, aiming for low unemployment,sustainable growth,andpredictable prices. While external factors can complicate their decisions, understanding the role of the Bank of Canada and its impact on financial markets strengthens your ability to navigate the complex financial world

Locating by in a Chaotic World: Swiss Monetary Policy

By- Mangesh N Funde & Utkarsh Shukla

The landlocked country of Switzerland, which is surrounded by the Alps, has long taken pride in its stable economy. The monetary policy of the Swiss National Bank (SNB), which gives price stability top priority while taking economic growth into account, has a significant impact on this stability. The Swiss National Bank has been treading carefully for many years. The mainstay of Swiss monetary policy has been striking a balance between price stability and the country's infamously strong franc. The recent spike in global inflation has rattled central banks all around the world. However, Switzerland is in an odd situation. The SNB has a distinct set of difficulties because of its lengthy history of negative interest rates and the strong franc, which serves as a natural inflation hedge.

Since 2000, Swiss monetary policy has aimed for price stability, defined as an annual inflation rate of less than 2% (Swiss National Bank). This emphasis on pricing stability has been maintained over the previous two decades. Switzerland's tiny openeconomy faces the issue ofa strong Swiss franc(CHF). This strength has the potential to put the economy under deflationary pressure by increasing the cost ofexports. Tooffset this, the Swiss National Bank (SNB) has traditionally interfered inthe foreignexchange market (IMF). From 2015until2022,the SNB used negative interest rates to weaken the CHF and increase inflation. This meant that banks were required to keep surplus reserves with the central bank (Bank for International Settlements). In June 2019, the SNB shifted from targeting a minimum exchange rate for the CHF to setting a policy rate as its principal monetary policy instrument (Bank for International Settlements).

The Swiss National Bank (SNB) wields a powerful tool in monetary policy, impacting not only the Swiss Franc's exchange rate but also the domestic bond market and currency. The analysisdelvesintothepastdecade (2014-2023)toexplore how changes in Swiss monetary policy have influenced the landscape of the Swiss bond market.

Impact on Swiss Bond Market

The SNB primarily uses two tools to steer monetary policy:

 Interest Rate Adjustments: The SNB sets the target for the 3-month Swiss Franc LIBOR (London Interbank Offered Rate), a benchmark for short-term interest rates. Raising the target rate makes borrowing more expensive, slowing economic growth and inflation. Conversely, lowering rates stimulates borrowing and economic activity.

 Foreign Exchange Intervention: The SNB intervenes in the foreign exchange market to weaken the Swiss Franc. This is crucial because the Swiss Franc is considered a safe-haven currency, attracting inflows during economic instability. A strong Franc hurts Swiss exports, making foreign exchange intervention a tool to maintain competitiveness.

A Decade of Change

Interest Rates and Bond Yields:

The SNB implemented a negative interest rate policy from 2015 to2023,withthe target LIBOR reaching a historic low of -0.75%. This aimed to weaken the Franc and stimulate the economy.

We would expect a negative correlation between interest rates and bond yields. As interest rates fall, bond prices rise, and vice versa. However, the relationship isn't always straightforward.

Impact on Bond Yields:

 Analyse charts comparing the 3-month LIBOR with the yield on Swiss government bonds of varying maturities (e.g., 2-year, 5-year, 10-year).

 During the period of negative rates, bond yields did decline across maturities, reflecting the easy money policy stance. However, the decline wasn't as dramatic as the negative LIBOR might suggest.

 This can be attributed to factors like global risk aversion and demand for safe-haven assets like Swiss bonds. When global economic uncertainty rises, investors flock to Swiss bonds, pushing yields down even in a lowinterest-rate environment.

Foreign Exchange Intervention and the Bond Market:

 The SNB's large-scale foreign exchange intervention to weaken the Franc also impacted the bond market.

 A weaker Franc makes Swiss bonds less attractive to foreign investors, potentially putting upward pressure on yields.

 Periods of significant SNB intervention might coincide with slight increases in bond yields, reflecting the reduced foreign investor interest.

Quantitative Easing (QE) and its Influence:

 In addition to negative rates and foreign exchange intervention, the SNB also engaged in QE programs, purchasing large amounts of Swiss government bonds and corporate bonds.

 QE directly increases demand for bonds, pushing yields down.

 Periods of increased QE activity might correspond to dips in bond yields, highlighting the program's effectiveness in suppressing yields.

The Evolving Landscape: Recent Policy Shifts: In December 2022, the SNB made a significant shift by raising the target LIBOR for the first time in 15 years. This signalled a move away from the ultra-loose monetary policy stance. We might expect to see a rise in bond yields as the SNB tightens its policy. However, the global economic environment and investor sentiment will also play a role.

Impact on the Stock Market

TheSwissstockmarket,whichservesasagaugeof thecountry's economic health, has shown increased volatility in reaction to changes in monetary policy. Investors who were formerly accustomed to the steadiness of Swiss stocks are now navigating rough waters due to the significant uncertainty around legislative changes.

The SNB's changes to interest rates may have a significant impact on stock values. A reduction in interest rates might encourage borrowing and spending, which would strengthen the stock market and the economy. On the other hand, a rise in interest rates could hinder economic expansion andcause stock values to fall. These kinds of swings might surprise investors, especially those who have been used to the consistent performance of Swiss equities.

Moreover, adjustments to monetary policy may have an effect on currency values, which would further complicate matters in the stock market. Switzerland's economy is heavily dependent onexports,and policy measures that strengthenthe Swiss franc might raise the cost of Swiss goods for purchasers abroad, which could reduce export income and have an impact on stock prices.

Changes in monetary policy have prompted a review of asset allocation plans and investor behaviour. Investors have recalculated their portfolios, comparing the relative attractiveness of other asset classes to stocks, in response to the threat of interest rate normalization.

Switzerland, which is well-known for its cautious and conservative monetary policies,has long giveninvestors a sense of confidence and created an atmosphere in which Swiss stocks were seen as a safe investment. However, investors find themselves navigating more turbulent seas as the Swiss NationalBank (SNB)and othermonetary authorities implement measures in reaction to economic conditions.

Sentiment on the market:

There is a cloud of uncertainty over market mood due to the fluctuating tides of monetary policy. Swiss stocks are vulnerable to changes in investor mood and fluctuating currency rates, especiallythosewitha highdegree ofexposure toforeigntrade. Investors are forced to take a more cautious stance in this climate,closely observing monetary policy statements andtheir possible effects on the stock market. It becomes essential to employ strategies like hedging, diversification, and keeping up with macroeconomic developments to navigate the choppy seas of the Swiss stock market.

Impact on Currency Dynamics

Movement of the Swiss Franc: The Swiss franc, which has long been seen as a bulwark of stability and a safe-haven asset, has seen drastic fluctuations in value due to shifting monetary policy dynamics. The SNB's careful handling of interest rates and foreign currency interventions has a significant impact on the value of the Franc on global markets.

SNB Interaction: To control currency volatility, the SNB must communicate its monetary policy decisions clearly and consistently. The Swiss Franc's excessive volatility is prevented by the central bank's excellent communication of its policy position.

Conclusion

It concludes that the Swiss National Bank (SNB) is navigating a complex situation with its monetary policy. For many years, Switzerland has prioritized price stability and combated the deflationary pressures caused by the strong Swiss franc. The SNB used negative interest rates and foreign exchange intervention to achieve these goals.

Recently, the global economic environment has shifted, prompting the SNB to raise interest rates for the first time in 15 years. This shift has implications for the Swiss bond market, stock market, and currency dynamics. Investors are reevaluating their strategies in response to the changing monetary policy landscape. The SNB's communication will be crucial in managing expectations and preventing excessive volatility in the Swiss franc. Overall, it highlights the challenges faced by the SNB in maintaining stability in a dynamic global economy. The bank's future policy decisions will continue to shape the economic landscape of Switzerland.

Investor Conduct:

Hong Kong's Monetary System Balancing Stability and Flexibility

By- Swarnima Sapre & Palak Maheshwari

Hong Kong, a global financial powerhouse, operates under a unique monetary policy system heavily influenced by its historical ties to mainland China. This system prioritizes currency stability over independent control over interest rates. This article explores the mechanics of this system, the Linked Exchange Rate System (LERS), and its impact on the Hong Kong Dollar (HKD), the bond market, and the stock market. We will also analyze how changes in US monetary policy, a key driver of Hong Kong's interest rates, have affected these markets over the past 5-7 years.

The Linked Exchange Rate System (LERS): A Mechanism for Stability

Responding toCapitalFlows: US interest rates significantly influence capital flows in and out of Hong Kong. When US interest rates rise, capital tends to flow out of Hong Kong seeking higher returns elsewhere. This outflow weakens the HKD. To counteract this, the HKMA intervenes by:



Selling HKD: The HKMA sells HKD in the open market. This injects additional Hong Kong dollars into the banking system, increasing liquidity.



Buying USD: The HKMA uses its foreign currency reserves, primarily USD, to buy HKD in the market. This reduces the supply of HKD, strengthening the currency and pushing the exchange rate back towards the peg.

Tightening or Loosening Money Supply: These interventions by the HKMA also impact the money supply in Hong Kong. Tightening (When US Rates Rise): By selling HKD, the HKMA reduces the money supply in the banking system. This can help curb inflation and maintain the peg. Loosening (When US Rates Fall): When US interest rates fall, capital flows into Hong Kong, strengthening the HKD. To prevent the HKD from appreciating beyond the peg, the HKMA intervenes by:

 Buying HKD: The HKMA buys HKD inthe open market, increasing liquidity in the banking system.

 Selling USD: Selling USD from its reserves absorbs the excess HKD, weakening the currency and maintaining the peg.

Hong Kong's economic success is deeply intertwined with its monetary policy framework, a cornerstone of which is the Linked Exchange Rate System (LERS). Implemented in 1983, the LERS pegs the Hong Kong dollar (HKD) to the US dollar (USD) within a narrow band of HK$7.75 to HK$7.85 per USD. This system functions like a robust currency board, ensuring stability and fostering confidence in the HKD.

The LERS operates througha series of automaticadjustmentsto maintain the exchange rate within the defined band. Here's a simplified breakdown:

 Strong Hong Kong Dollar: When demand for HKD surpasses supply, driving the exchange rate towards the strong-side limit (HK$7.75), the Hong Kong Monetary Authority (HKMA)intervenes. They sellHKD in exchange for USD, increasing supply and pushing the rate back within the band. This intervention also expands the monetary base, potentially lowering interest rates in Hong Kong.

 WeakHongKongDollar: Conversely,ifthe exchange rate weakenstowards the weak-side limit (HK$7.85),the HKMA steps in by buying HKD with USD. This reduces HKD supply and steers the rate back towards the peg. Consequently, the monetary base contracts, potentially raising interest rates.

Market Interventions by the HKMA

The Hong Kong Monetary Authority (HKMA), acting as a de facto central bank, actively manages the LERS through market interventions. Here's a breakdown of how the HKMA maintains the peg:

The Exchange Fund serves as the HKMA's war chest for managing the LERS. It holds a combination of assets:

 Foreign Currency Reserves (primarily USD): These reserves are used by the HKMA to buy HKD when needed to maintain the peg. According to the HKMA's 2023 Annual Report, the Exchange Fund stood at a massive HK$4.0 trillion (US$513 billion) as of December 31, 2023. This substantial size provides a buffer for the HKMA to intervene in the market and maintain the peg.

 HongKongDollarAssets: Theseassetsinclude Hong Kong government bonds and other instruments denominated in HKD. These can be used for various purposes within the LERS framework.

In 2022, when the US Federal Reserve began raising interest rates, the HKMA was obligated to follow suit in Hong Kong. This led to a rise in borrowing costs for Hong Kong businesses, potentially impacting their profitability.

The strong HKD in recent years has challenged some Hong Kong exporters, particularly in sectors like textiles and electronics.

Benefits of the LERS:

The LERS has undoubtedly been successful in fostering exchange rate stability. Since a refinement in 2005, the HKD has fluctuated within a very tight band of HK$7.75 to HK$7.85 per USD. This stability is crucial for Hong Kong's open and tradereliant economy. Businesses can confidently engage in international transactions without worrying about drastic currency fluctuations that could erode profit margins.

Challenges of the LERS:

 Limited Monetary Policy Independence: The LERS ties Hong Kong's interest rates to those of the US. When the US Federal Reserve raises interest rates, the HKMA is obligated to raise Hong Kong's base rate to maintain the peg. This limits the HKMA's ability to set independent monetary policy to address domestic economic conditions.

 Limited Exchange Rate Flexibility: The peg can hinder the HKD's ability to appreciate against a weakening USD. This can potentially make Hong Kong exports less competitive in the global market, especially when compared to countries with appreciating currencies.

 Speculative Attacks: Investors may attempt to profit by betting against the peg's sustainability during periods of economic turmoil. The HKMA can defend the peg using capital controls and interest rate adjustments. However, these tools have limitations and can be controversial.

Impact on Bond Market

The LERS ties Hong Kong's interest rates to those of the US. When US interest rates rise, the HKMA raises the base rate (the rate at which banks can borrow HKD from the HKMA) to maintain the peg. This, in turn, increases interest rates on HKDdenominated bonds. Higher bond yields (interest earned on holding a bond) can make Hong Kong bonds more attractive to investors seeking higher returns, particularly institutional investors with a global investment strategy. While the US saw significant interest rate hikes in 2022, the impact on Hong Kong's G3 bond market issuance (bonds denominated in major currencieslikeUSD,EUR,andJPY)was limited.Issuanceactually contracted by 54% year-on-year to US$89.2 billion This could be due to a broader global contraction in the G3 bond market. However, Hong Kong's CNH market (bonds denominated in Chinese yuan) saw significant growth. Total new issuance increased by 24% year-on-year to RMB688.0 billion (US$99.7 billion) driven by a surge in certificates of deposit (CDs).

Impact on the Stock Market

When US interest rates rise, the HKMA raises the base rate to maintain the HKD-USD peg. This makes borrowing more expensive, potentially reducing investment in the Hong Kong stock market. Conversely, lower US interest rates can lead to a looser monetary policy in Hong Kong, potentially boosting the stock market. The Hang Seng Index exhibited volatility over the past seven years. It reached a peak of 33,489 in January 2018 but experienced significant drops in 2018-2019 due to the USChinatrade warandglobaleconomicslowdown.Sincethen,the index has shown signs of recovery, reaching 24,000 in April 2024.

Impact of the LERS on the Stock Market

The LERS can also influence the Hong Kong stock market in a few key ways:



Sectoral Impact: A strong HKD relative to other currencies canmake Hong Kong exports more expensive for foreign buyers. This can disproportionately hurt export-oriented companies, such as those in manufacturing or logistics, as their profit margins get squeezed. Conversely, import-substitution companies that sell domestically priced goods might benefit from a strong HKD, as imported goods become relatively more expensive. Investors may adjust their holdings based on these dynamics.

 Mergers and Acquisitions (M&A): The LERS fosters a stable currency environment, which can make Hong Kong a more attractive target for foreign companies looking for acquisitions. Conversely, Hong Kong companies might find it easier to acquire foreign firms due to the stable exchange rate reducing currency fluctuations

The ECB’S Symphony

By- Bhavishya Bade & Suhani Gour

F

rance, one of the European Union's top economies, has a big say inwhat monetary policies are implemented in the area. The European Central Bank (ECB) oversees France's monetary policy, although the nation also takes independent action to tackle particular economic issues. Its central bank, the Banque de France, is crucial in steering the French economy through its monetary policy decisions. These decisions, often made in conjunction with the European Central Bank (ECB), significantly impact the French stock market, bond market, and the Euro.

According to the ECB's mandate, the major goal of French monetary policy is to preserve price stability inside the Eurozone Maintaining price stability is essential for encouraging investment, growing the economy, and preserving consumer purchasing power. Over the medium run, the ECB wants to keep inflation in the Eurozone below 2% but still quite close to it. France bases its policies on this goal to provide economic stability and predictability.

Tools for Monetary Policy

France does not directly control monetary policy tools like interest rates or the money supply because it is a member of the Eurozone. The European Central Bank (ECB), which determines the key interest rates for the Eurozone, including France, makes these decisions. The primary refinancing operations, the deposit facility, and the marginal lending facility are the three main tools that the ECB utilizes to carry out monetary policy. To assist its economic objectives, France can nevertheless implement complementary measures with some degree ofautonomy. Forexample, fiscalpolicy,whichdeals with taxing and spending by the government, can have an indirect impact on the monetary conditions in the nation. Furthermore, France can put in place focused policies to deal with certain issues, including credit-easing plans to encourage lending to small and medium-sized businesses (SMEs).

The Banque de France utilizes various tools to influence financial markets:

 Interest Rates: By adjusting the benchmark interest rate, the central bank influences borrowing costs. Lower rates make borrowing cheaper,stimulating economicactivity and potentially boosting stock prices. Conversely, higher rates can dampen economic growth and stock market performance.

 Quantitative Easing (QE): This involves the centralbank purchasing government bonds, and injecting liquidity into the financial system. This can drive bond prices up and yields down, while potentially weakening the Euro's value.

The global epidemic has had a serious negative impact on France's economy and health. Preserving lives while reducing the financialtollthe pandemictakes onthe nation is stillthe top objective.

From 2017 to 2023, France's monetary policy unfolded against a backdrop of both domestic and international economic challenges. Aligned with the broader Eurozone policies set by the European Central Bank (ECB), France navigated a period of historically low interest rates and multiple rounds of quantitative easing aimed at stimulating economic growth and inflation. The ECB's forward guidance provided markets with insights into the future direction of monetary policy, while macroprudential measures were implemented to safeguard financial stability.

A shifting Landscape: The potential impact of rising rates

 Stock Market: Following the 2008 financial crisis, the ECB maintained historically low interest rates. This, coupled with QE programs, contributed to a strong rebound in the French stock market, the CAC 40. From 2017 to 2023, the CAC 40 saw a significant rise, with some fluctuations. With inflation concerns rising globally, the ECB is signalling potential future interest rate hikes. This could impact the French financial landscape as Rising interest rates can make borrowing more expensive and potentially dampeninvestor sentiment, leading to a correction or slower growth in the stock market.

 Bond Market: Low interest rates and QE programs fuelled a surge in French government bond prices, pushing yields down. This made French bonds less attractive to income-seeking investors compared to periods with higher yields. Whereas, As interest rates rise, bond prices typically fall, potentially making them more attractive to investors seeking higher yields.

 The Euro: The ECB's accommodative monetary policy, alongside global economic factors, has generally weakened the Euro's value against other major currencies like the US Dollar. Higher interest rates in the Eurozone could make the Euro more attractive to investors, potentially leading to a rise in its value.

Despite the efforts, France contended with persistent issues such as sluggish growth, high unemployment, and the need for structural reforms to enhance competitiveness. Additionally, external factors such as Brexit uncertainty and global trade tensions posed further risks to the economic outlook. Throughout this period, France's monetary policy aimed to strike a balance between supporting growth, maintaining price stability, and addressing financial vulnerabilities amidst a complex and evolving economic landscape.

France's Monetary Policy and its Influence on Stock Market Volatility

France's monetary policy intricately intertwines with the stock market, dictating several key dynamics. Firstly, adjustments to interest rates by the central bank directly impact borrowing costs for businesses, influencing corporate investment and profitability. Lower rates stimulate economic activity, potentially boosting corporate earnings and elevating stock prices. Conversely, rising interest rates can dampen investment and weigh on stock valuations. Additionally, monetary policy decisions shape investor sentiment, with accommodating policies fostering confidence and buoying stock prices.

Economic growth expectations are also influenced, as expansionary policies aim to stimulate activity during downturns, potentially driving stock market gains. Furthermore, changes in inflation expectations prompted by monetary policy shifts can impact corporate earnings and purchasing power, further affecting stock prices. Ultimately, the intricate interplay between monetary policy and the stock market underscores the importance of central bank decisions in shaping equity market dynamics and investor behaviour.

France's Monetary Policy and its Influence on Bond Markets

Changes in France's monetary policy wield significant influence over the bond market, manifesting through various channels. Primarily, alterations in the central bank's policy rates directly impact short-term bond yields, inducing shifts in bond prices. Moreover, these policy adjustments sculpt the yield curve, flattening or steepening it based on whether rates are raised or lowered. Investor sentiment is also swayed by monetary policy signals, shaping expectations on inflation and future yields. Concurrently, credit spreads respond to shifts in borrowing costs, expanding or contracting accordingly. Additionally, changes in monetary policy can ripple through foreign exchange markets, affecting bond attractiveness for foreign investors. Ultimately, France's monetary policy nuances navigate the complexities of the bond market, shaping yields, prices, and investor decisions. This breakdown provides insight into the distribution of bond market shares among various financial institutions in France. It indicates the relative dominance or presence of different institutions in the market, allowing stakeholders to assess market dynamics and potential risks.

The yield of three and six-month bonds issued by the French government from January 2018 to December 2022

Since early 2020 the difference between the yield on three and six-month bonds issued by the French government has fluctuated, with six-month bonds being higher in early and late 2020, while three-month bonds recorded a higher yield at most other points of this period. As of December 2022, three-month bonds recorded a yield of 1.78 percent, while six-month bonds

recorded 2.02 percent. Positive bond yields signify that investors receive more money at the bond's maturity than the original purchase price of the bond, owing to low demand for the bond on money or capital markets.

France’s Monetary Policy and its Impact on Currency Valuation

France's currency is intricately tied to the monetary policy decisions made by the European Central Bank (ECB), reflecting the broader dynamics of the Eurozone. Through adjustments in interest rates,money supply,andeconomicstimulus measures, the ECB influences the value of the euro, which in turn affects France's currency. Changes in monetary policy can impact exchange rates, with adjustments signalling shifts in economic conditions and influencing investor sentiment. Market participants closely watch ECB announcements and economic indicators to anticipate currency movements, highlighting the interconnectedness between monetary policy and currency dynamics in France.

Conclusion: France’s Tightrope Walk

France's monetary policy navigates a complex landscape, balancing its individual needs with the broader Eurozone framework set by the ECB. While the ECB dictates key interest rates, France can utilize fiscal policy and targeted measures to address specific challenges. The past few years saw historically low rates and quantitative easing to stimulate growth, impacting the French stock market (CAC 40) positively but pushing bond yields down. As inflation concerns rise, the potential for future rate hikes could lead to a slowdown in stock market growth, a rise in bond yields, and a potential strengthening of the Euro. Looking ahead, France's monetary policy will continue to walk a tightrope, aiming for stability and growth while managing vulnerabilities in an ever-evolving economic environment.