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Pause on Rate Hikes? Not so Soon! ⏯️

Maybe the markets got too excited too soon. Inflation isn't leaving fast enough, and central bank policy reversal too may not happen soon enough. Last week’s inflation data had investors worrying again:

India’s January CPI hit a three-month high of 6.5% versus 5.7% in December - again inching up beyond comfort levels

The concern the inflation print has fostered stems from the fact that only fuel, out of the 5 major groups in the CPI basket, didn't increase month-over-month. Core inflation has remained sticky for the last three months.

Higher and sticky core inflation goes against RBI’s projections and objective of ‘durable disinflation’. The 25 bps rate hike in February was indeed a reduction in the velocity of hikes.

However, with this inflation data, another 25 bps rate hike in the next meeting on April 6 cannot be ruled out.

Naturally, India’s bond yields continued their way up with the 10-year yield touching 7.39% on February 17, 2023.

The yield curve also further flattened as the appetite for short-term securities reduced, with tighter liquidity and expectations of continued hikes.

With this, the spread between 1-year and 10-year bonds has dropped to its lowest in four years.

While yields are already factoring in expectations of another hike in April, the February inflation data would be a critical indicator.

💡 Our View: Another hike in April pushes the possibility of a reversal in monetary policy towards the end of the year. However, it would be a good idea to start shifting maturities on debt portfolios in a couple of months (or even lesser) as policy standby if not reversal offers a window for locking yields.

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