Asia Rates: End of RBI hike cycle may be further out

To open lower this morning
Group Research, Duncan Tan04 Oct 2022
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    Expect Asia rates to open lower this morning on the back of fairly large overnight declines in Core rates (10Y UST yields down 18bps).

    CNY Rates - Onshore markets are closed for Golden Week holiday. Expect very light trading in NDIRS.

    INR Rates - Prior to last Friday's MPC meeting, we were of the view that OIS rates above 7% could be a receive. Our economist had forecasted that the policy repo rates would peak at 6.25%. This would had meant that, post the 50bps hike last week to 5.90%, RBI would be quite close to the end of its hike cycle. However, the MPC meeting has led us to believe that this hike cycle has more room to go and our economist has since revised peak policy repo rate to 6.50%. Therefore, we now think that OIS rates need to be 7.25-7.50% for there to be ample risk premium to support a receive call. On GSec outlook, downside risks to total returns have grown - Relying more on rate hikes to tighten monetary conditions could justify or lead to a reduction in FX intervention.

    IDR Rates - September headline inflation printed 5.95% YoY against survey 6.00% and August 4.69%. Core inflation printed 3.21% against survey 3.50% and August 3.04%. While September prints came in below survey, bond markets are likely to stay cautious around the impact of recent fuel price hikes. Inflation prints could continue to rise in coming months, but we think BI would succeed in anchoring medium-term inflation expectations and thereby, limit bond repricing from higher inflation. Released 4Q issuance target (IDR) of IDR75tn is lower than 3Q target of IDR167tn and 4Q21 target of IDR81tn. 4Q schedule includes 5 conventional auctions and 5 sukuk auctions. Smaller issuances in 4Q has likely been well-expected by the market because of the budget deficit being revised lower and excess cash balances and therefore, should not significantly move bond prices.

    KRW Rates - September trade balance recorded a deficit of USD3.8bn vs survey USD3.0bn, representing a sixth straight monthly deficit balance. It is difficult to be bullish on KTBs as long as Korea's trade deficits stay wide. Some of the main drivers such as elevated energy prices (including gas and coal), slowdown in Chinese imports and downturn in global chip demand are likely to persist for some time, meaning that we are unlikely to turn bullish this year. That said, there could be some near-term stabilization as policymakers have gotten more vocal against volatility in local markets and have been announcing several stabilization measures. Most notably, currency swap with NPS and outright bond purchases would certainly help to restraint one-sided weakening expectations.

    Duncan Tan

    Rates Strategist - Asia

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