Asian markets failed to join the rally in US equities, held back by concerns over further escalation in the West Asia conflict. US equities touched record highs yesterday, supported by optimism over the earnings outlook and some stabilization in global bond yields. The stabilization in yields was helped by a moderation in crude oil prices. The US 3-year Treasury auction for USD 58 bn also drew stable demand, with a bid-to-cover ratio of 2.62. Meanwhile, the US dollar index eased modestly after touching its highest level since April 2025 earlier in the week. Today, the focus shifts to the FOMC minutes from the September policy meeting, which should offer further clarity on the Fed's rate trajectory.
Domestic Markets
The RBI's MPC will announce its rate decision today, and the market has largely priced in a 25-bps hike to 5.50%. Attention will center on any revision to the inflation forecast and the accompanying commentary, which should offer cues on the pace and extent of further tightening. We do not expect any major liquidity absorption measures beyond what the central bank has already been doing (including OMOs and sell/buy swaps).
Key Market Drivers
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Crude oil: Brent crude traded below USD 100 pb as rising Middle Eastern crude exports and a G-7 emergency stockpile release eased supply concerns. However, it inched higher during Asian trade today to USD 101.53 pb on reports of further escalation in tensions in the Middle East.
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EUR/USD: After touching a low of 1.1160 on Monday, the pair recovered to trade at 1.1240 at the time of writing. A moderation in crude oil prices eased pressure on French bond yields, which had been weighing on the pair. Yields were further stabilized after National Rally presidential candidate Marine Le Pen proposed spending cuts to reduce France's budget deficit from 5.4% of GDP to 2.2% by 2032. Despite this relief, ongoing political and fiscal uncertainty in Europe is expected to keep EUR/USD range-bound between 1.1200 and 1.1300 in the near term.
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USD/JPY: The pair is trading above 158.40 at the time of writing. It could continue to trade in a narrow range of 157-159 in the near term, as intervention risk from the BoJ remains high. BoJ policy maker Ayato Sato, who dissented against the September rate hike, said she supports hiking rates in several stages. The BoJ is expected to keep rates on hold at its October meeting and to hike by 25-bps at its December meeting.
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USD/INR: The pair depreciated by 0.1% yesterday to close at 96.42, weighed down by FII outflows.
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India 10Y yield: The yield closed ~2-bps lower at 7.198% yesterday. Today, the focus will be on the RBI MPC decision and commentary for cues on the rate trajectory. In the near term, we expect the India 10Y yield to trade in the range of 7.15-7.25%.