Which impact on inflation could have RBI's recently announced fiscal measures?

Key highlights

German business morale rose unexpectedly in May due to a pick-up in the services sector in Europe's largest economy that helped offset the impact of high inflation, supply chain problems, and the war in Ukraine, a survey showed. The Ifo institute said its business climax index rose to 93.0 in May following a reading of 91.9 in April, revised up slightly from 91.8. A Reuters poll of analysts had pointed to a May reading of 91.4.

The European Central Bank is likely to lift its deposit rate out of the negative territory by the end of September and could raise it further if it sees inflation stabilizing at 2%, ECB President Christine Lagarde said.

RBI governor Shaktikanta Das told in an interview that India had entered into another phase of coordinated fiscal and monetary action to quell inflation. The recently announced fiscal measures will have a sobering impact on inflation going forward.

USD/INR movement

The USDINR pair made a gap up opening at 77.70 levels. The pair traded within the range of 77.51-77.70 and closed the day at 77.5150. The USDINR pair gave up its earlier gains and fell today on the back of broad weakness in the US dollar globally. However, unabated foreign fund outflows and firm crude oil prices weighed on the Indian rupee and kept the appreciation bias capped. The concerns over stagflation and aggressive interest rate hike fear will keep pressurizing the Indian rupee. Investor focus is likely to be on a speech by Federal Reserve Chairman Jerome Powell, scheduled for Tuesday, as well as the second reading of first-quarter gross domestic product data, due out on Thursday.

Global currency updates

The EURUSD pair has continued to edge higher at the beginning of the week. Heightened optimism about China moving ahead with easing restrictions in Shanghai seems to be helping the market mood to remain upbeat. The data from Germany showed that the business sentiment surprisingly improved in May, providing an additional boost to the shared currency. Adding to that, the recent hawkish ECB commentary, with policymakers hinting towards a July rate hike, is supporting the rise in the Euro currency. The GBPUSD pair was marginally higher after improved risk sentiments globally and a decline in the US dollar index from decadal highs. The focus will be on the BoE Gov Bailey Speech due later today.

Bond market

U.S. Treasury yields rose today as concerns about inflation and economic growth remained in focus for investors. The yield on the benchmark 10-year Treasury note climbed to 2.83%. Treasury yields moved lower throughout last week, as investors looked to find a safe haven in government bonds, amid heavy selling in stock markets. Domestic bond yields resumed their upward journey after the Centre on Saturday slashed excise duties on petrol and diesel which is expected to impact Government's borrowing maths. India's 10-Year Bond Yield settled 3 bps higher from the previous close at 7.388%.

Equity market

Indian equity benchmarks Sensex and Nifty 50 finished a volatile session in the red giving up their initial gains, as Dalal Street entered the monthly derivatives expiry week. Losses in financial, metal, realty, and pharma shares pulled the headline indices lower, though gains in auto and IT stocks arrested the fall. Broader markets also failed to stay in the green, with the Nifty Midcap 100 dropping 0.4% and its smallcap counterpart 0.8% at the close. Investors awaited the last leg of financial results from India Inc for cues.

Evening sunshine

"Focus to be on the BoE Gov Bailey speech and Eurogroup meetings."

European stocks and U.S. equity futures edged higher today due to risk on sentiment, while the dollar extended modest declines against its global peers. The focus will be on the BoE Gov Bailey Speech and Eurogroup meetings due later in the day.