US CPI rose 5.4% yoy (0.9% MoM) in June against expectations of 4.9% yoy (0.5% MoM). This was the biggest YoY rise since 2008. The US yield curve has seen almost a parallel shift of 5bps. US 2y inflation expectations have risen by 17bps to 2.82% since the CPI print while the nominal yield has risen 5bps to 0.25%. Short-term real rates have therefore become more negative. The Dollar however has strengthened across the board. Global Risk sentiment has been dampened post the CPI print. US equities ended the session with modest cuts. Given the elevated inflation, the focus will be on Fed Chair Powell's testimony before the House Financial Services Committee.
Rating agency S&P maintained India's sovereign rating at BBB-, the lowest investment grade. It projects GDP growth for FY22 at 9.5%. It said FX Reserve buffer and a stronger external position would offset the risk associated with higher Government deficit and debt.
Domestic equities are likely to open soft given the weak close on Wall Street and weakness in Asian equities.
OIS was down 4bps, reacting to lower than expected domestic CPI. 3y and 5y OIS had ended at 4.73% and 5.33% respectively. Bond yields were mostly unchanged. Bonds are likely to be under pressure today given the elevated US CPI and 5bps uptick in US yields
For the second straight session yesterday, nationalized banks likely supported 74.40. Zomato IPO opens today. Short-term forwards have got paid on funding pressure. Longer-term forwards are mostly unchanged with a 1y forward yield of around 4.47%.
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.
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