Differing convictions in monetary policies

Minutes from the Feb RBI monetary policy committee (MPC) review reflected concern over inflation, owing to uncertain geopolitics, volatile crude prices, and weather-related events. Outside of food, inflation was seen at the risk of hardening further, requiring policymakers to take calibrated action. The two dissenting members see the need to pause and allow the lagged impact of policy actions to play out, citing emerging growth risks. A majority of the MPC is likely to vote for a 25bp hike in April with an unchanged stance, due to an elevated Jan inflation outturn, sticky core, and a likelihood that February inflation (out in midMarch) might also stay close to 6.3-6.5 per cent, before turning data dependent on the path ahead.

Overnight US Fed minutes also reaffirmed their tough stance on inflation, increasing the likelihood of a higher terminal rate. A hawkish RBI MPC stance will help counter the impact of any resultant jump in the US yields/ US dollar. That said, the policy preference is to keep the currency at competitive levels vs regionals. The RBI mopped up net $3.8 billion in December 2022, after $4.4 billion in November 2022, which partly explains the INR's underperformance in late-2022 even as regional FX appreciated on a sliding US dollar. Concurrently, the outstanding forwards book has also risen to $10.96 billion from $0.2 billion in October, as intervention was conducted in spot as well as forwards and authorities remain keen to rebuild FX reserves. As a result, the INR REER slipped below 100 in January 2023, addressing valuation concerns vs key trading partners. In the nearterm, with strong US data driving DXY higher, the RBI will seek to contain one-sided weakness in the rupee and keep intraday volatility in check.

Indonesia Rates: BI Governor to return for a second term

Indonesia's President has nominated the incumbent Bank Indonesia (BI) Governor Perry Warjiyo for a second term, after his current term ends in May. This decision bodes well for policy stability and continuity, as Governor Warjiyo enjoys the confidence of domestic as well as international markets. While possible on legal grounds, this decision breaks from norm as most past governors have usually served one term.

The ruling party's majority in the parliament will pave the way for the nomination to go through smoothly. Current Finance Minister Indrawati Mulyani was rumoured to be as one of the potential contenders for this position, besides BI's Senior Deputy Governor, among others. For now, the benchmark rate is likely to be left on hold in March, with any unexpected bouts of volatility in the rupiah likely to be met by intervention efforts. A sharp realignment in the Fed's terminal rate expectations might, nonetheless, bring precautionary hikes back in view.

( is Senior Economist at DBS Group Research)

Asia Rates: BOK unlikely to match Fed on 2023 hikes; Low 10 IndoGB yields

By Duncan Tan

Against rising short and longterm US rates, the front-end of Asia curves would be better anchored by Asia central banks' expected earlier end to hike cycles (relative to US). Long-term Asia rates would however follow rising US to a larger extent (higher beta). Therefore, we think low-beta rates markets like Singapore and Korea could steepen relative to US, because of a more anchored front-end.

IDR Rates

10Y IndoGB yields have been very well-anchored despite much higher 10Y UST yields and flattening in the pace of foreign bond inflows, largely because of the strength of domestic bond demand. With BI using monetary operations and sale of short-term bonds to push the front-end curve higher, so as to improve transmission and act as a buffer against increased Fed uncertainty, the risks are that domestic demand for long duration bonds could wane and 10Y IndoGB yields would eventually need to reprice higher to maintain its attractiveness relative to frontend rates.

KRW Rates

BOK kept its policy rate unchanged at 3.50 per cent. The growth outlook remains weak, but increased Fed uncertainty and recent pickup in inflation (Jan print) would preclude BOK from pivoting dovish. 1Y to 5Y KRW IRS rates have bounced 15-35bps in February, largely a one-to-one beta move to higher US rates. We think that ultimately, Korea's weak growth outlook would mean that BOK is unlikely to match the Fed on rate hikes in the coming months. Therefore, the recent retracement higher in KRW IRS would be a fade, either via receive outright or more preferably, against pay US rates (relativevalue).

(Duncan Tan is Rates Strategist at DBS Group Research)

FX Daily: Fed has a more straightforward rate path than