INR: Oil-driven pressures and resilient data – DBS

DBS Group Research economist Radhika Rao notes that India’s 10Y bond yield is moving back towards 7% as Brent Oil trades above $110 and markets price tighter policy. She highlights resilient real economy data, with industrial production and Purchasing Managers' Index (PMI) readings holding up despite supply shocks. Rao also flags Indian Rupee (INR) weakness, rainfall risks and ongoing vulnerability of INR assets to volatility.

Yields, INR and growth resilience

"INR 10Y bond yield headed back towards 7% this week, hardening in response to Brent holding above $110pb, and markets pricing in the likelihood of tighter rates going forward."

"The OIS [Overnight Indexed Swap] market witnessed significant moves, with the 1Y gauge pointing to a near reversal of rate cuts undertaken in the past year, despite the RBI [Reserve Bank of India] signaling a preference to look through temporary price pressures, if the second order impact is contained and core measures stay anchored."

"Adding to energy developments was the IMD’s [India Meteorological Department] forecast of deficient rainfall this summer, posing potential upside to ex-cereal food inflation."

"The INR erased gains driven by NOP [Net Open Position] changes and is back on a gradual depreciating bias towards mid-94 handle, attracting counter intervention bids, not helped by a subdued portfolio flows outlook."

"Overall, until clear signs of a resolution to the US–Iran conflict emerge, INR assets are expected to stay vulnerable to volatility and downside risks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)