RBA Set to Hike Rates Again Amid Inflation Surge and Global Uncertainty 
Goldman Sachs Raises ECB Rate Hike Forecast Amid Persistent Energy-Driven Inflation 
Fed Rate Cut Hopes Fade as Oil Prices Stoke Inflation Fears 
Bank of Japan Holds Rates Steady Amid Iran War Inflation Fears 
RBA Raises Cash Rate to 4.10% in Closest Vote Since Transparent Voting Began 
RBA Set for Back-to-Back Rate Hikes, Westpac Forecasts 
BOJ Holds Interest Rates Steady Amid Middle East Uncertainty 
Bank of Japan Officials Signal Continued Interest Rate Hikes Amid Inflation Concerns 
Fed Holds Rates Steady as Middle East Conflict Clouds Inflation Outlook 
The Reserve Bank of India (RBI) upheld its policy rates unchanged at 6.00% yesterday, widely expected by the market. Notably, there has been a remarkable change in RBI’s forecast. The central bank cut the growth forecast for 2017-2018 fiscal year (India’s fiscal year starts from April) to 6.7% from 7.3%, but revised up the inflation forecast for the second half of the FY to 4.2 - 4.6% from 4.0 - 4.5% previously.
In our opinion, the more significant reduction in GDP growth (0.6 pct points), compared with a mild revision on inflation, indicates that there exists an easing bias in the monetary policy stance.
Most of the economists also project a 25bps cut to the policy rates in RBI’s December meeting.
On the flip side, the dollar (DXY) is back to its robustness 2nd successive month of trade-weighted gains, mirroring a four-week gain in Treasury yields amid hopes of a tax-cutting fiscal package and expectations of a December Fed rate hike. It is foreseen that more hawkish Fed backdrop has the potential to boost USD sentiment against EM currencies.
GST reform was cited as the major reason behind the revisions.
The sluggish GST reform has worsened the economic outlook, but will still give a one-off shock (although moderated) on inflation over the foreseeable future. Clearly, before we have a clearer picture of the impact of GST reform, the uncertainties surrounding India’s economy will remain.
On the flip side, the USD fell mildly against major currencies on the back of profit booking owing to lower ADP employment data ahead of US September non-farm payrolls data tomorrow. September ADP employment rolls were at 135,000 rolls against 237,000 previously.
USDINR futures contracts of October month delivery on the NSE ended at 65.22. The near-month OI reduced 2.35% from the previous day, while November OI rose by 1.52% in the previous session.
Hence, contemplating these derivative market developments, it is projected that the USD to bump into supply pressure at higher levels going forward. Accordingly, we reckon that it wise to snap dips to initiate longs on the USDINR using mid-or-far month futures contracts on hedging grounds.
