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. Nonetheless, recent GSec auctions have drawn decent demand (long end supply has moderated), leading to a modest flattening impact on the overall curve. The OIS market witnessed significant moves, with the 1Y gauge pointing to a near reversal of rate cuts undertaken in the past year, despite the RBI signaling a preference to look through temporary price pressures, if the second order impact is contained and core measures stay anchored. March inflation had climbed to 3.4% yoy but was accompanied by modest increases in core and core-core growth. WPI inflation rose above the retail gauge for the first time in nearly three years in March on across-the-board increase in input prices, also reflected in PMI price sub-indices. Adding to energy developments was the IMD’s forecast of deficient rainfall this summer, posing potential upside to ex-cereal food inflation. The next forecast update in May is likely to be watched with interest. The INR erased gains driven by NOP 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.
Incoming real economy data points to relative resilience yet far. Mar industrial production rose 4.1% yoy, faring better than consensus expectations but rising by the slowest pace in five months. Besides better mining activity, firms likely dipped into existing inventories to avoid disruption and absorbed an increase in costs, with consumer durables (led by autos) faring better than non-durables. Notably, manufacturing and services PMI also rebounded in April, signaling resilient private sector activity likely on expectations that the energy supply shortage and high fuel prices will prove to be short-lived. By contrast, core sector output contracted marginally in Mar, dragged by a sharp fall in fertiliser output and other-energy related segments. Incoming data in March and April largely point to supply-side impact on growth, while demand indicators have held up, reflected in indicators like GST, auto sales, commercial vehicle sales etc. On a related note, supply issues crimped demand for cooking gas, and other petroleum products in the month.
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