US Inflation Rate Slows Down, To Set The Tone For World Markets

US Inflation Rate yesterday came in at 7.1%, much lower than the market expectations of 7.3% and from the previous month 7.7%. This is 2nd consecutive print lower than expectations. This almost cements a moderated rate hike of 50 bps by the US FMOC scheduled to meet today, down from the past four jumbo hikes of 75 bps. Although the FOMC may indicate a higher peak rate of ~5%, it may not be very market disruptive as long as the rate cycle peaks in early 2023.

Indian headline CPI also surprised positively with a print of 5.88% as against market expectation of 6.3% led by a sharp price drop in vegetables. While the core inflation remains sticky at above 6%, CPI print under 6% adds to the sentiment that even MPC may be nearing a peak of the rate cycle by early 2023. Additionally, a much more stable currency market and the recent surge in India’s Fx reserves adds a safety cushion against global uncertainties.

However, fiscal supply overhang may still continue for some time and the General Budget in Feb 2023 will be keenly watched to get guidance on G-Sec borrowing in FY24.

With expectations of the peaking of the rate cycle in early 2023 and the already elevated yield curve, we believe risk-reward has turned favorable for debt market with high gross yields and much lesser volatility, especially in up to the 5-year segment considering the almost flat yield curve.

Actively managed, high credit quality debt schemes which are largely deployed across 1 to 5-year segment as a layered approach are suitable placed not only to provide high accrual but also provides the flexibility to capture upside capital gain potential over the medium term by actively managing the duration.

According to Reuters reports the Indian rupee is expected to open lower against the dollar on Tuesday ahead of the U.S. inflation data that will help in assessing the outlook for interest rate hikes in the world's largest economy. The rupee is tipped to open at 82.64-82.66 per U.S. dollar compared with 82.53 in the previous session. According to reports in Times of India the retail inflation dipped below the Reserve Bank of India's (RBI) upper tolerance level of 6% for the first time in 11 months in November as softening prices of food items brought relief, as per official data released post market hours on Monday.

In a tweet, the finance ministry said the steps taken by the government has helped in bringing down the inflation below the RBI's tolerance level and expressed confidence that prices of cereals, pulses and edible oils will ease further in the coming months.

The US inflation data for November month will be released on Tuesday, December 13. The highly-anticipated inflation data comes just ahead of the two-day scheduled Federal Reserve meeting that would decide the magnitude of the next rate hike. The inflation rate would be released at 7 PM IST (1330 GMT). The US consumer inflation report on Tuesday will set the tone for the market. In addition to the Fed, the European Central Bank and the Bank of England are also set to announce interest rate hikes, as policymakers continue to put the brakes on growth to curb inflation.

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