FCNR scheme to end early as softer US data delay rate-hike expectations: Axis Bank

India’s headline CPI inflation rose broadly in line with expectations while underlying trends remained masked by a high base in vegetable prices and lower gold prices, according to a report by Axis Bank. The report noted that some pass-through of higher petroleum, electronics, and fertiliser prices was also visible.

Wholesale price inflation (WPI) edged lower, led by petroleum prices, although that trend has since reversed. The merchandise trade deficit widened, driven by a rebound in gold imports and higher commodity and electronics prices.

The first-quarter balance of payments data showed a slowdown in remittances amid developments related to FCNR deposits, while the basic balance remained negative. Quarterly Periodic Labour Force Survey (PLFS) data also confirmed earlier observations of female labour migration towards rural areas around state elections, alongside weaker sowing activity during the early part of the period.

The Reserve Bank of India (RBI) announced the early closure of its swap schemes, effective August 31.

Softer US data cloud rate-hike outlook

In the US, both consumer price index (CPI) and producer price index (PPI) inflation came in softer, although some pass-through from petroleum prices was visible. The transmission of PPI inflation to personal consumption expenditure (PCE) inflation was somewhat higher despite the softer headline readings.

Retail sales weakened against a high base created by online shopping while the University of Michigan’s consumer sentiment index deteriorated amid the resumption of the West Asia conflict and higher inflation expectations.

Regional Federal Reserve officials remained hawkish, highlighting persistent inflation risks. At the same time, the National Federation of Independent Business business optimism index reached an 11-month high, supported by stronger hiring and capital expenditure plans.

Eurozone growth holds up

Investor sentiment in the eurozone improved, as reflected in the Sentix index, likely supported by better German factory orders. Industrial production also strengthened, partly due to earlier upward revisions.

Eurozone GDP growth was confirmed, while employment continued to rise. Inflation in Italy and Spain was revised higher, reflecting the transmission of global petroleum and electronics prices.

In the UK, GDP growth slowed as consumption, government spending and inventories weakened, despite strong capital expenditure. June activity was supported by stronger trade and transport services.

China credit demand remains weak

China’s credit data weakened further, with new yuan loans recording a record level of repayments. Total social financing (TSF) was supported largely by government bond issuance, pointing to continued weakness in underlying credit demand.

Japanese economic data remained limited, although media reports consistently pointed to the possibility of the Bank of Japan bringing forward a rate hike.

Global bond yields declined during the week, supported by lower crude oil prices and softer inflation data, although the US Treasury curve steepened towards the weekend as uncertainty around the Federal Reserve’s policy outlook increased.

The US dollar was supported during the first half of the week and reached a peak in the absence of yen intervention. However, softer inflation data and weaker retail sales triggered a sell-off towards the weekend.

Precious metals initially benefited from lower interest rates but subsequently retreated, while industrial metals remained range-bound. Crude oil prices declined as the US shifted from kinetic to financial measures in its response to Iran.

The Indian rupee remained capped on the upside amid market chatter over RBI intervention, despite significant importer demand. Indian bond yields declined during the week, supported by lower crude oil prices, and healthy demand. Liquidity conditions remained comfortable, with variable rate reverse repo operations required to keep overnight rates stable.