USDINR pair witnessed a sharp fall in the previous week, amid broad risk-off sentiments post a more astonishing CPI data, which led to a sharp decline in the dollar index and US treasury yields. Feelings were further boosted by robust FII inflows into domestic equities, rising Sensex to near all-time high levels. The Indian 10-year government bond yield fell to 7.3% in November, tracking the external sentiment amid lower US Treasury yields and a weaker dollar. Indian government bonds were also aided by reports stating that spending by the central government should be less than the amount budgeted this financial year for the first time since 2019/20. On the economic data front, India’s industrial production rose by 3.1 percent year on year in September 2022, amid a rebound in Manufacturing output.
The greenback plunged by 4.14%, towards 106 levels, as Democrats faced a tough path in the midterms, with Republicans widely expected to win both houses, which would make it harder for President Joe Biden to implement his policy agenda. The major pain for the dollar came after the US CPI data surprised on a downside, rising 7.7% in October compared with 8.2% in September, bolstering the Fed’s slower pace of rate hikes in the future and cementing a 50 bps rate hike for December FOMC meeting. Meanwhile, the Fed funds terminal rates, which were seen at 5.1% ahead of the CPI data, fell to 4.9% post the inflation print. Money market swaps are also pricing in two rate cuts of 25 bps in 2023, though Fed chair Jerome Powell dashed any hopes of rate cuts in 2023 during the recent FOMC press conference. Owing to the re-pricing of the rate hike curve, US 2-year and 10-year treasury yields fell 31 bps in the previous week.
Outlook for the week: India CPI, US Retail sales in focus
Investors keenly await domestic CPI and trade balance data for November month. India’s CPI is expected to come lower at 6.7% in October compared with 7.41% in November. Inflation cooling towards the RBI’s upper target range of 6% might bolster the central bank’s softer stance on rate hikes.
RBI focuses on domestic growth and is unlikely to do a trade-off between growth and inflation, which might lead to terminal rates of 6.25% in the current hiking cycle. This move has also attracted robust FII inflows into domestic equities. FPI Net investments witnessed an inflow of Rs.16,169 crores so far in November.
Sentiments are also lifted amid optimism about China easing. China issued a rescue package for its struggling property market and has eased some Covid Zero restrictions.
The dollar index started the week on a strong footing, as Democrats retained control of the senate after the Nevada victory and Fed’s Waller said that the market got “way out in front” over the unexpected cooling in inflation, reminding that Fed’s outlook is not going to change with just one good CPI data. However, weaker-than-expected CPI data casts a dark shadow in the short term and we might see the greenback weakening towards 105 levels on prospects of policy pivot. US Retail sales data also will be in focus.