Indian rupee eyes key US data, bond yields seen easing as 2024 kicks off

MUMBAI: The Indian rupee is likely to take cues this week from moves in the dollar index while keeping an eye on key US labour market data, and bond yields are expected to trend lower going into 2024.

The rupee ended slightly lower at 83.2075 against the US dollar on Friday, pressured by dollar demand from importers and a slight recovery in the dollar index.

Investors are currently pricing-in an 85% chance of a US rate cut in March, per the CME Group’s FedWatch tool.

The domestic unit ended 2023 down about 0.5% year-on-year and logged its sixth straight annual decline. Through last week, the rupee remained in a range between 83.10 and 83.35.

“Our view is that rupee should appreciate from here amid broadly supportive global cues,” said Abhilash Koikkara, head of forex and rates at Nuvama Professional Clients Group.

If the labor market data reinforces the view of potential cooling in the US economy, the dollar index may decline further, aiding the rupee, Koikkara added.

Other key US data scheduled for release this week include initial jobless claims on Thursday, followed by the closely watched non-farm payrolls and unemployment print on Friday.

The non-farm payrolls likely fell to 158,000, down from 199,000 in November, according to a Reuters poll.

A pickup in foreign inflows into Indian markets has also offered some support to the rupee, but the domestic unit has been unable to gain much as the central bank likely intervened in last few weeks to absorb the inflows, according to traders.

Of the total $28.7 billion of inflows into Indian equities and bonds in 2023, about $10.1 billion came in December alone, according to NSDL data.

Meanwhile, Indian government bond yields are expected to fall further, with attractive levels enticing value investors.

India’s 10-year benchmark bond yield ended marginally lower last week at 7.1754%, after rising the preceding week.

Traders expect the yield in the 7.10%-7.20% range this week, and anticipate volumes to pick up after shallow trading in the last week of 2023.

The Indian government bond yield curve is set to steepen in 2024 as bets of rates cuts from the Federal Reserve and Reserve Bank of India gather steam. Bonds will also remain supported as state-run banks, the largest holders of bonds and which were net sellers in November and December, are expected to turn into buyers, traders said.

Investor focus will also turn to US Treasuries and whether the 10-year yield is able to breach new levels after easing below the key technical level of 3.85% towards the end of December.

Market participants have aggressively bet on US rate cuts and are eyeing over 150 bps of cuts in 2024, even though the Fed has signalled only 75 bps of cuts.

“Bonds over the next quarter are likely to remain range-bound, with a mildly bullish bias on the back of global bond sentiment and in anticipation of eventual moderation in headline inflation in the coming quarters,” said Sandeep Bagla, CEO of Trust Mutual Fund.