Expected inflows in Indian stocks will restrain USD / INR’s huge rise
opened the day much higher at 74.63, registering an 18 paise / USD gain from Tuesday’s close. The currency pair is now expected to test the hard support level of 75.00 due to the continued rise in global oil prices and surging US yields to a new high in the last one year period.
After the OPEC plus countries decided on Monday to stick to their existing production plan, oil prices soared. Prices peaked at $ 83.13 / bbl on Tuesday and are currently trading at $ 83.04 / bbl and prices have already risen nearly 60% in 2021 to date. Higher prices will increase the bill for oil imports and worsen the current account deficit, which would weigh on the rupee.
The sharp rise in US yields influenced the rise in USD swap rates. The 5-year USD swap rate is currently listed at 1.09% and the swap spread between the 3-month USD Libor and the 5-year USD fixed swap rate has increased significantly to 96 bps from around 65 pb a month ago. The widening of the swap spread indicates that there is more room for US yields to rise against the backdrop of the Fed’s downward timeline and that interest rates should be raised at least once over the course of the year. the second half of 2022 and two rate hikes in 2023 also to have the neutral rate set at around 1% per year.
The prices of government bonds ended down. The yield on the benchmark 10-year sovereign bond is currently listed at 6.28% per annum. A rise in global oil prices raised fears of rising domestic inflation, a factor that pushed bond prices down. A rise in US rates has increased the pressure on domestic gilts. The central bank’s indication that it would stick to its budgeted borrowing amount for the fiscal year, however, boosted the appetite for debt. At the MPC meeting scheduled for October 6-8, the market expects the RBI to increase its repo rate by 25bp or more from the current 3.35% per year. This can reduce appetite for bonds and encourage higher bond yields.
RBI’s MPC meeting may give a signal to the market that inflation fears in developed markets may soon impact the local market due to a surge in global oil prices.