Index snub to test Indian bonds; rupee, RBI policy and US-Iran war in focus

MUMBAI: The Indian rupee and government bonds will take cues from the central bank’s policy decision this week, with rates widely expected to remain unchanged, while traders will closely watch comments on inflation as the Iran war strains energy supplies.

The rupee closed at 95.38 on Friday, posting its biggest weekly gain since March, as persistent interventions by the Reserve Bank of India lifted the currency to a three-week high.

Modest inflation and strong dollar inflows, aided by measures to bolster the balance of payments, are expected to give the RBI room to stand pat on borrowing costs even as inflation risks from elevated oil prices and weak rainfall linger.

“With the INR having broadly stabilized following the RBI’s recent FX measures, we see limited need for the MPC to turn more hawkish near term,” analysts at Goldman Sachs said in a note.

The firm expects the RBI to raise rates by 25 basis points each in October and December.

Indian rupee ends flat as robust importer hedging blunts oil price relief

Traders expect the rupee to strengthen slightly after U.S. President Donald Trump said on Saturday that Washington would hold off on a fresh attacks on Iran if a deal is reached soon.

Lower oil prices and continued dollar inflows, supported by the central bank’s measures to improve India’s balance of payments, are expected to support the rupee. However, Bloomberg Index Services’ decision to defer the inclusion of Indian government bonds in its Global Aggregate Index could weigh on the currency.

Central bank data showed that India’s foreign exchange reserves rose to a two-month high in the latest reporting week, while the Reserve Bank of India’s outstanding forward dollar liabilities fell at the end of June.

The improvement was helped in part by nearly $41 billion raised under measures introduced to strengthen the country’s balance-of-payments position.

Bonds

Government bonds are set to weaken in the first half of the week after Bloomberg’s decision to defer index inclusion dented investor sentiment, with most participants having viewed the move as a near certainty.

Bonds fell last week, with yields posting a third consecutive weekly rise, pressured by volatile oil prices and rising uncertainty over the inclusion.

India bond bulls stung as index inclusion snub sends shockwaves

In a post-market release, Bloomberg announced its decision to defer inclusion, but said it will continue to assess bonds for inclusion.

The 10-year benchmark yield ended at 6.8343% on Friday, one basis point higher for the week following 11 bps of rise in the preceding two weeks.

Traders expect the benchmark yield to move in the 6.80%-6.92% range this week, at least until the central bank policy decision, with the RBI’s commentary acting as major trigger.

“The decision is a near-term disappointment for investors who had priced in India’s inclusion. It signals that while the reform direction is encouraging, the index provider wants to see reforms sustained,” Hemant Mishr, founder and CIO of Singapore-based S Cube Capital.

Foreign investors net sold bonds worth almost $600 million in the last six sessions, under the fully accessible route, which includes the biggest weekly outflow in four months, on uncertainty over oil prices and index inclusion.

Still, foreigners remain net buyers of $3.9 billion of FAR bonds between June 1 and July 31. Debt under FAR is part of three emerging market debt indexes.