The Indian rupee may slip to a record low this week, with traders eyeing cues from the country’s federal budget, while the government likely sticking to fiscal discipline could cheer bond traders.
The rupee closed at a record closing low of 83.6625 against the U.S. dollar on Friday, with likely intervention by the Reserve Bank of India helping limit losses. The currency was down 0.1% for the week.
“The RBI seems to be exhibiting greater tolerance for rupee weakness in order to correct the overvaluation,” forex advisory firm IFA Global said in a note.
Broad-based dollar demand, including from oil and defence companies, has pressured the rupee in recent trading sessions, traders said.
“Even minor 2-3 paisa dips (on USD/INR) are quickly bought, so overall bias remains to the upside,” a foreign exchange trader at a large private bank said. The trader added that while the rupee is likely to stay under pressure, outsized moves will be capped by the RBI.
India’s federal budget announcement is due on Tuesday, with investors closely watching for any revisions to the country’s fiscal deficit target and government’s gross market borrowing for the financial year ending March 2025.
U.S. GDP and personal consumption expenditures data, due later in the week, will also be in focus for cues on the U.S. policy rates. Investors currently expect the Federal Reserve to begin cutting rates in September.
Meanwhile, the Indian 10-year government bond yield ended at 6.9641% on Friday, down 2 basis points last week after staying flat in the previous week. Traders expect the benchmark yield to move in the 6.90%-7.05% range this week, depending on the budget announcements.
Bond yields may see an upward move at open later, as the central bank net sold bonds worth 34 billion rupees ($406.10 million) in the week ended July 12, according to data released after market hours on July 19. This was first such sale after a gap of more than eight months.
Bond yields have barely budged over the last two weeks amid a lack of stronger triggers to break on either side of current levels, and have been unaffected by other factors.
A Reuters poll shows median forecasts for the fiscal deficit target at 5.1% of gross domestic product and the gross borrowing at 14.13 trillion rupees, the same as February’s interim budget.
Still, some market participants are not ruling out a cut in borrowing after a record surplus transfer from the central bank earlier in the year.
ICICI Securities Primary Dealership estimates a reduction of 500 billion rupees in net and gross borrowing, roughly corresponding to the absolute fall in fiscal deficit between interim and regular budgets.
Focus would also remain on foreign inflows as government bond purchases from overseas investors have crossed $1 billion mark after a slow start post inclusion of debt in JPMorgan’s emerging market debt index in June. KEY EVENTS: ** India 2024-25 budget presentation – July 23, Tuesday ** U.S. June existing home sales – July 23, Tuesday (8:30 p.m. IST) ** India HSBC July manufacturing, services, composite PMI – July 24, Wednesday (10:30 a.m. IST) ** U.S. S&P Global July manufacturing, services, composite PMI – July 24, Wednesday (7:15 p.m. IST) ** U.S. June new home sales – July 24, Wednesday (8:30 p.m. IST) ** U.S. June durable goods – July 25, Thursday (6:00 p.m. IST) ** U.S. April-June advance GDP estimate – July 25, Thursday (6:00 p.m. IST) ** U.S. initial weekly jobless claims for week to July 15 – July 25, Thursday (6:00 p.m. IST) ** U.S. June personal consumption expenditure, core PCE index – July 26, Friday (6:00 p.m. IST) ** U.S. July U Mich sentiment – July 26, Friday (7:30 p.m. IST) ($1 = 83.7240 Indian rupees)
