By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI – The Indian rupee’s direction this week is likely to be determined by whether the country’s central bank steps in to cap depreciation after the currency fell to a historical low on Friday, while bond yields will track U.S Treasuries.
The rupee slumped to a record low of 83.43 in the closing minutes of the session on Friday before ending at 83.4250 against the U.S. dollar. It notched a decline of 0.7% for the week, its sharpest weekly fall in more than seven months.
Indian markets were shut on Monday for a local holiday.
In the offshore non-deliverable market, the rupee extended the decline further, with the USD/INR one-month NDF rising to a high of 83.79, suggesting expectations of the spot being around 83.73.
It eventually recouped some of those losses with the one-month NDF quoting around 83.49/83.50, as of Tuesday morning, implying a spot rate of around 83.43/83.44. Weakness in the offshore Chinese yuan, a buoyant dollar and lack of substantial dollar inflows weighed on the rupee on Friday, traders said.
The rupee’s offshore recovery suggests the RBI was active in the NDF market “in all likelihood”, a senior FX trader at a state-run bank said.
The rupee’s performance will also depend on how the Chinese yuan and other emerging market currencies perform, said Abhilash Koikkara, head of foreign exchange and rates at Nuvama Professional Clients Group.
The dollar index slipped on Monday after ending the previous week up by nearly 1%, while Asian currencies recovered slightly.
Meanwhile, the 10-year Indian government bond yield ended at 7.0927% on Friday, gaining 3 basis points in the week after a similar rise in the previous week. Traders expect the yield to move in a 7.01%-7.09% range in the last week of the financial year.
Bond yields inched higher last week amid an unprecedented supply of debt from states, while concerns over the Federal Reserve’s timing and extent of interest rate cuts in 2024 also weighed on sentiment.
Even as the Fed maintained its outlook for three rate cuts this year, markets do not seem fully convinced and remain wary of any aggressive bets on Treasuries.
Still, any major rise in Indian yields will be capped as demand-supply dynamics remain favourable amid expectations of a rise in foreign inflows in the next quarter, which will concide with the inclusion of domestic bonds in JPMorgan’s emerging market index.
Foreign investors have already bought bonds under the Fully Accessible Route worth nearly 100 billion rupees ($1.20 billion) on a net basis in March, adding to aggregate net purchases of around 367 billion rupees in the first two months of 2024, data showed.
India’s stable exchange rate has been a key factor behind the foreign flows and such investments are expected to persist as the South Asian country’s debt gets added to global indexes, traders said.
Traders will now gear up for the RBI’s monetary policy decision, due in the first week of April, for cues on liquidity as well as interest rates.
“The spread between overnight to 10-year point has adequate room to compress even without a rate cut, and that compression would happen on demand-supply dynamics and re-rating of India risk,” Suyash Choudhury, head of fixed income at Bandhan Asset Management Company said. KEY EVENTS:
** U.S. Feb durable goods – March 26, Tuesday (6:00 p.m. IST)
** U.S. March consumer confidence – March 26, Tuesday (7:30 p.m. IST)
** U.S. final estimate of Oct-Dec GDP – March 26, Thursday (6:00 p.m. IST)
** U.S. initial weekly jobless claims week to March 18 – March 28, Thursday (6:00 p.m. IST)
** U.S. March U Mich sentiment – March 28, Thursday (7:30 p.m. IST)** India Feb fiscal deficit data – March 29, Friday (3:30 p.m. IST)
** India Feb infrastructure output data – March 29, Friday (5:30 p.m. IST) ** India Oct-Dec current account and balance of payment – March 25-March 29
** U.S. Feb personal consumption expenditure, core PCE index – March 29, Friday (6:00 p.m. IST)
($1 = 83.6313 Indian rupees)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Sonia Cheema, Krishna Chandra Eluri and Sherry Jacob-Phillips)
