Rate hike risks rise in India; global markets remain focused on inflation

The minutes of the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting implied a higher probability of a rate hike in October, although December remains the most likely timing, according to an Axis Bank report. The minutes highlighted the need to recalibrate policy rates as inflation normalises. 

India’s core-sector industrial production rose 5.4% year-on-year, led by iron ore, electricity, and cement. The HSBC flash PMI also improved, driven by stronger services activity, although inflationary pressures increased across the economy. Urban unemployment among people aged 15 years and above edged higher as a rise in female labour-force participation outpaced job creation. Rural unemployment, however, declined on seasonal factors and improved sowing. Outward direct investment rose sharply, driven by equity outflows and possibly linked to concessional swap flows. 

In the US, Federal Reserve minutes indicated that several officials would support a rate hike if inflation failed to cool, easing market fears that many policymakers favoured an immediate increase. The S&P Global flash PMI rose to a 52-month high, led by services while inflation pressures softened. The New York Fed and Philadelphia Fed manufacturing surveys also strengthened sharply, supported by improved employment. 

US industrial production benefited from defence and artificial-intelligence investment, while housing data remained mixed. The US Treasury signalled a significant increase in long-end Treasury buybacks, with the cap more than doubled, to maintain a steeper yield curve. 

In Europe, eurozone inflation was confirmed, with core and services inflation pushed higher by medicines and energy and semiconductor pass-through effects. German ZEW sentiment improved on stronger activity and fiscal support, while the S&P Global flash PMI climbed to a nine-month high, supported by stronger new orders and softer inflation. 

Japan’s CPI inflation rose in line with expectations, driven by higher energy and raw-material costs, reinforcing expectations of a Bank of Japan rate hike at its next meeting. In China, retail sales slowed further, particularly across discretionary categories, while industrial production weakened in traditional sectors. Robots, new-energy vehicles and semiconductors remained areas of strength. Fixed-asset investment contracted more deeply, while deflationary conditions continued to support expectations for CNY appreciation. 

Markets at a glance 

Developed-market yields initially fell as the US increased long-end buybacks, but the move was not sustained amid recovering crude prices, market scepticism over the buyback strategy and stronger PMI data. The broad US dollar declined sharply as concerns over fiscal dominance increased following the buyback announcement, prompting continued rehedging of US assets. 

Precious metals gained on dollar rehedging and momentum, while industrial metals were more mixed amid uneven sentiment. The absence of progress in West Asia kept oil prices elevated. 

Spot INR remained capped amid intervention chatter and intense importer hedging. Indian rates moved higher during the week, pressured by crude oil and rupee movements. Domestic liquidity remained easy, requiring continued absorption through variable-rate reverse repo (VRRR) operations. 

Key data ahead 

Markets will track India’s IIP and weekly statistical data, alongside monsoon and food-price trends. In the US, focus will be on the GDP revision, personal income and spending, PCE inflation, durable-goods orders, retail sales, consumer confidence and MNI PMI. 

Eurozone money and confidence data, German GfK and Ifo surveys and French consumer spending will also be watched, alongside UK CBI retail sales. China’s NBS PMI, activity and financial data are due while Japan’s Tokyo inflation, retail sales, labour-market data, and GDP will remain in focus amid expectations of further policy normalisation.