MUMBAI: The Indian rupee and government bond yields are expected to be rangebound in the week before a critical US Federal Reserve meeting, with the latter likely to trade with an easing bias, as markets await fresh cues.
The rupee finished at 82.09 per dollar last Friday, down 0.30% for the week to snap a four-week winning streak.
The currency was pressured by a resurgent dollar index and rising US yields, as expectations of another Fed rate hike were bolstered by central bank officials expressing concerns about inflation and mixed economic data.
A 25-basis-points (bps) hike at the Fed’s May 2-3 meeting was fully priced in, but there was uncertainty about whether another hike would be needed and when would rate cuts begin.
Trading could remain choppy in the near term amid a lack of triggers and following an apparent slowdown last week in foreign investor inflows into Indian equities, traders said.
“The rupee could move within a broad 81.50 to 82.50 range,” said Anil Bhansali, head of treasury at Finrex Treasury Advisors, with the possibility it stays within a very narrow 81.90 to 82.35 band this week.
US personal consumption expenditures (PCE) price index data, the Fed’s preferred inflation gauge, due on Friday, would be important.
Meanwhile, India’s benchmark bond yield ended at 7.1856% on Friday.
It fell four bps last week, as against remaining largely unchanged in the previous week. Traders expect the benchmark yield to move in the 7.15%-7.24% range this week.
Bond yields fell across the board on Friday after stronger-than-expected demand at a debt auction triggered heavy short covering. “There was good demand at the debt auction, and post that short covering multiplied the impact.
Some incremental accretion of small savings deposits is also leading to investment in bonds,“ said VRC Reddy, treasury head of Karur Vysya Bank.
Indian rupee likely to hold firm after weakening below key near-term level
The decline in bond yields came despite the minutes of the Reserve Bank of India’s latest meeting tilting towards hawkishness.
India’s current rate tightening cycle may not be over as more hikes could be warranted to align inflation towards the central bank’s medium-term target of 4%, according to the minutes.
The RBI had surprised markets by holding the key lending rate at 6.50% on April 6, going against expectations of a 25 basis point hike.
“Even as the minutes seem disconnected from the vote shift, we think the bar to raise rates will only get higher from here on,” said Madhavi Arora, lead economist at Emkay Global.
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