Inflow cushion to anchor Indian rupee against month-end flows; bonds track oil, Treasuries
- The Indian rupee closed nearly flat at 95.6950 on Friday, down about 0.3% week-on-week but avoiding steeper losses on account of sustained interventions by the Reserve Bank of India
MUMBAI: The Indian rupee is likely to be rangebound this week as robust capital inflows, supported by policy measures, help contain volatility, while government bonds may face headwinds as markets focus on oil prices and US Treasury yields.
The Indian rupee closed nearly flat at 95.6950 on Friday, down about 0.3% week-on-week but avoiding steeper losses on account of sustained interventions by the Reserve Bank of India.
Over the weekend, the central bank said it has garnered nearly $73 billion under measures rolled out in June to strengthen India’s balance of payments, helping boost the country’s FX reserves in striking distance of their record high.
Bankers and analysts say inflows have bolstered the central bank’s ammunition to anchor the currency, which is expected to persist this week.
“Market participants want to position long Dollars but are fearing RBI presence around 95.80. Interbank activity and participation therefore seemed muted,” FX advisory firm IFA Global said in a note.
Month-end flows related to derivative maturities and corporate payments are among the factors, which could strain the rupee this week alongside still elevated oil prices due to Iran war.
After nearly six months of war since the US and Israel launched airstrikes against Iran on February 28, the sides are not firing at each other but also showing no sign of pursuing peace talks.
Outcomes of central bank policy reviews in South Korea, the Philippines and Thailand will also be in focus as policymakers navigate inflationary pressures and volatility spurred by the Middle East conflict.
Bonds
Government bonds are likely to trade in a narrow range, after the benchmark bond yield witnessed its sharpest weekly rise so far this financial year in the previous week, crossing the crucial level of 6.85%.
The 10-year bond yield ended at 6.8495% on Friday, up 9 basis points, the biggest spike since the week ended April 3, after falling an aggregate of 7 basis points in the previous two weeks.
Traders expect the benchmark yield to move in the 6.80% to 6.89% range, with a trading holiday on Wednesday and commentary from Fed officials on Thursday-Friday.
The minutes of RBI’s latest meeting released on Wednesday showed policymakers are open to rate hikes, if inflation risks materialise and broaden.
Governor Sanjay Malhotra said that evidence of such spillovers could warrant “policy tightening”, while Deputy Governor Poonam Gupta said a case for a hike may emerge this year.
The benchmark Brent crude contract gained nearly 7% last week and was around $94 per barrel mark, a concern for India’s inflation outlook.
The focus would also remain on foreign investors after India was not included in a global index on July 31.