CPI Inflation Remains Above RBI's Target Band

• Global developments

In the absence of any major data, the risk sentiment seems to be holding up well. US treasuries continue to get sold off. Long-term inflation expectations have risen. European equities and Dow futures were negative earlier major European indices managed to end in the green and S&P500 and Nasdaq printed new all-time highs yet again. The focus will be on the US June CPI today (headline expected 0.5% MoM and core CPI expected 0.4% MoM). We believe an in-line print would be good for risk whereas an upside or a downside surprise could result in a risk-off. ECB chair Christine Lagarde said that the ECB would change policy guidance at the next meeting on 22nd July. The Euro has remained relatively stable despite her comments. China June trade data came in better than expected this morning.

• Domestic developments

The CPI rose 6.26% yoy in June compared to market expectations of 6.50%. Inflation relented sequentially on a drop in food inflation, more specifically vegetable prices. The IIP grew by a lower than expected 29.3% in May yoy against expectations of 33%.

• Equities

The Nifty had given up gains from earlier on in the session to end flat yesterday. broader markets had outperformed.

• Bonds

Bond yields across the curve were by 3-5bps yesterday. The yield on the benchmark 10y ended at 6.11%. Rates were little changed with 3y and 5y OIS ending at 4.77% and 5.36% respectively. While the reaction in bonds to the CPI print may be muted, OIS may cool off 2-4bps.

• USD / INR

The Rupee opened strong but gave up gains as domestic equities turned lower. Nationalized banks were persistently seen on bid around 74.40. Near-term forwards up to 2-3 weeks could see some paying on account of IPO-related flows.

Strategy: Exporters are advised to cover a part of their near-term exposure on upticks toward 74.90. Importers are advised to cover through options. The 3M range for USDINR is 72.50 – 75.50 and the 6M range is 73.00 – 76.50.

Stay tuned on WikiFX, more news coming soon!