Asia Rates: RBI decision and FTSE Russell Review Results
Volatility in UK rates have been a bigger driver of the direction of Asia rates, more so than Fed speak or US data. The intraday moves in UK rates have been so large (30-60bps for up to 10Y) that a 0.3x beta assumption would imply 10-20bps moves in Asia rates. So, taking a near-term view on the direction of Asia rates would certainly require a view on UK rates. Asia policymakers are increasingly concerned (and vocal) about the volatility spillovers onto Asia local markets and we expect more stabilization measures to be announced in coming weeks. While stabilization measures won't totally dampen volatility, they can help to prevent one-sided weakening expectations in Asia local markets.
KRW Rates - In FTSE Russell's Country Classification Review Results released after US close, South Korea has been added to the watchlist for potential inclusion in WGBI. We expect South Korea to be officially added to the WGBI at the March 2023 . Assuming 2.0-2.5% weight and USD2.5-3.0tn AUM following the WGBI, passive KTB inflows could amount to USD50-75bn in 2023 and 2024. We expect KTB reaction today to be small with yields potentially falling 2-8bps, since the bond inflows are likely still 6-9 months out from here and KTBs are already well-owned by foreigners. Today's positive index outcome would be more consequential for Korea's BOP's outlook, as the potential size of unhedged bond inflows are quite sizeable compared to Korea's current and capital accounts.
INR Rates - Our economist expects a continued hawkish stance and a third consecutive 50bps hike at today's MPC meeting. If RBI stays hawkish and delivers 50bps today, we think somewhat counterintuitively, that OIS rates would likely fall. Month-to-date, 5Y OIS rates have rebounded higher to around 7%, but this is some way below the 7.35% in mid-June (previous peak in global rates). In constrast, in US and other Asia swap markets, current 5Y rates are higher than their respective peaks in mid-June. We think this points to rates markets being less worried now about inflation risks in India (compared to before), likely because of RBI's frontloaded tightening. The economy is also not alone now in seeing above-target inflation. Also on a relative basis, inflation prints are not rising as fast or as far away from target as seen recently in other economies. Therefore, there have likely been less paying pressures on OISs (compared to earlier in the year) and we think receive interest could build from here. If we compare the size of remaining rate hikes that are priced into India OISs vs regional swap markets, RBI could end its hike cycle sooner than regional central banks.
FTSE Russell kept India on the watchlist for potential inclusion into the EMGBI. Though the country didn't get added to the EMGBI, we expect the reaction in the GSec to be modest today as the AUM following EMGBI is small. The more consequential index decision would be JPM's announcement for GBI-EM that could come in the next 2-3 weeks. Today's FTSE Russell outcome reduces the likelihood that India would be added to GBI-EM, as it suggests that there have not been sufficient progress on overcoming operational hurdles.
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