The Reserve Bank of India's Governor heaved a sigh of relief late on Friday, saying the central bank's monetary policy seems to be working.

He was responding to April CPI inflation falling more than market expectations to 4.7% from 5.7% in March. The market had expected a fall to 4.8%.

"The inflation number for April, which was released today, was 4.7%. So, this gives me and my colleagues in the RBI a reasonable amount of confidence. I would say there is a good amount of confidence that the monetary policy is on the right track," Das said.

Bond traders now believe the RBI will not raise interest rates at its June meeting. From a hawkish pause in April, it may signal a dovish pause, holding the repo rate at 6.5%.

Last week also saw the US CPI inflation printing below 5% for the first time in two years.

The Fed will need to see more than one month of data to be confident that price pressures are on a sustained downward path.

Federal Reserve officials, in their speeches and interviews, did not offer words that could encourage the market's expectations of rate cuts later this year. That and a higher-than-expected long-term inflation view from a University of Michigan survey dampened both stocks and bonds on Friday.

Meanwhile, political imbroglio continues over raising the debt ceiling for the US government. Treasury Secretary Janet Yellen has been warning that the US will default on payments in June if the debt ceiling is not raised.

To recap, Republicans recently passed a bill that would raise the borrowing limit while also cutting government spending. President Biden wants a higher debt limit without conditions.

Indian Markets Last Week:

Stocks managed to close in the green for the third week in a row, led by gains in auto and financial shares. Seven of the 13 major sectoral indices advanced. Midcap and small-cap shares remained in the limelight. They gained for seven weeks in a row.

Government bond yields fell sharply on Friday due to strong demand at the auction of ₹390 billion of bonds. Banks that held short positions were forced to cover them. Moreover, some in the market had inked that April CPI inflation would be lower than market expectations. After hours, those expectations turned out to be true. The 10-year fell below 7%, which was its lowest level in over a year.

The rupee fell to a three-week low on Friday, recording its worst week in nearly two months. The safe-haven appeal of the dollar weakened most Asian currencies during the week which was also marked by incessant purchases of the dollar by oil companies. Exporter and foreign fund dollar sales limited the rupee's fall.

Global Markets Last Week:

The debt-ceiling standoff and hawkish comments from Fed officials kept US stocks in a tight range last week. The S&P 500 ended the week down 0.3%, while the Nasdaq 100 eked out a 0.6% advance. The fall on Friday was led by weaker mega-cap shares following their recent rally.

US yields rose Friday after a survey of long-term inflation expectations rose to its highest reading since 2011. Earlier in the week, the yields had fallen as the April CPI fell below 5%. The short-end yield curve was distorted owing to concerns about the US Congress not raising the debt ceiling. The fear was that the government would default on some short-term papers.

The dollar rose against the euro and pound as the unit's safe-haven appeal grew. Expectations of high long-term inflation, based on the University of Michigan survey, made investors unsure if the Fed would indeed opt for a pause in interest rates at its next meeting in June. Fed officials, too, have been more hawkish than expected in their speeches and interviews.

Corporate Bonds

Secondary Market

Last week, the yields on 3-year and 5-year corporate bonds remained unchanged while the yields on 10-year bonds eased as US CPI inflation was lower than predicted.

Outlook For This Week

Government bonds will likely rally, as could stocks, due to expectations that the RBI may be done with interest rate increases. This follows the sharper-than-expected fall in CPI in April. Profit sales would limit the rise in both bonds and stocks. The rupee could remain weak due to the dollar's global strength and importer demand for the US currency.

In Other News

• IIP growth falls to 5-month low of 1.1% in March.
• April CPI at 18-month low of 4.70%, core CPI at near 3-year low.
• April inflation gives confidence that MPC on right track, says RBI Das.
• India April merchandise export seen $35 bln-$40 bln.
• Congress beats BJP, set to form next government in Karnataka.
• SC to give order Monday on SEBI plea for more time to probe Adani case.
• CBI registers corruption case against Aryan Khan case officer Sameer Wankhede.
• Former Pakistan PM Imran Khan gets bail from Islamabad HC in corruption case.
• Erdogan rival says has evidence of Russia's online campaign ahead of Turkey election
• Iran nuclear monitors express concern after inspections plunge.
• US consumer sentiment drops to six-month low in May.
• Alphabet CEO Pichai to meet EU industry chief, EU deputy chief on May 24.
• G7 finance chiefs debate reducing supply chain reliance on China.
• Elon Musk names NBC Universal's Linda Yaccarino as new CEO of Twitter.

News Events This, Next Week

• May 15: WPI for April, by Office of the Economic Adviser.
• May 14-15: Merchandise trade data for April, by commerce ministry.
• May 16: US retail sales data for April.
• May 16: Industrial Production data for April.
• May 16-18: Life insurance first-year premium for April, by Life Insurance Council.
• May 16-18: Rupee REER for March, by RBI.
• May 16-18: FDI inflow for February, by RBI.
• May 16-18: Domestic air passenger traffic for April, by DGCA.
• May 16-18: Crude, refinery output for April, by petroleum ministry.
• May 19: CPI for rural and farm labourers for April, by Labour Bureau.
• May 31: GDP for Jan-Mar, by NSO.
• May 31: Provisional Annual Estimates of GDP for 2022-23 (Apr-Mar), by NSO.
• May 31: Government finances for 2022-23 (Apr-Mar), by CGA.
• May 31: Core sector output for April, by Office of the Economic Adviser.
• May 31: CPI for Industrial Workers for April, by Labour Bureau.