The Indian rupee is expected to extend its rally this week after the central bank announced a host of measures to boost inflows, while government bonds are also likely to gain as fears of aggressive rate hikes recede.
The rupee closed at 94.9450 per dollar on Friday, posting its biggest gain in two months, shored up by the measures announced by the Reserve Bank of India (RBI) to attract dollars. The currency also logged a third consecutive weekly gain.
The RBI will offer hedging benefits to state-run companies raising external commercial borrowing, and provide a similar facility for banks that raise three- to five-year deposits from non-resident Indians. Both facilities will be available until September 30.
“We believe that because the RBI wanted to focus on the FX package this time around, it did not hike rates; it did not want markets to get an impression that it wants to use rate defence for shoring up the INR,” economists at HSBC said in a note.
State Bank of India expects inflows of more than $34 billion from the so-called FCNR (B) deposits alone.
“We could see more upside in the rupee this week, as traders may continue to cut long dollar positions,” a trader with a foreign bank said.
On the global front, traders were cautious over the lack of progress in a potential US-Iran peace deal, which continues to put upward pressure on oil prices.
Meanwhile, a stronger-than-expected US jobs report for May fuelled concerns that inflationary pressures would increase the likelihood of Federal Reserve interest rate hikes.
Bonds bounce back
The yield on India’s 10-year benchmark bond ended at 6.9772% on Friday, down 2 basis points for the week, after shedding 6 bps in the previous week.
Bond yields eased after the RBI did not hike rates, as feared by a fourth of the market participants, and the commentary was not hawkish as some had anticipated.
Traders expect the 10-year yield to move within a 6.92% to 7.02% range this week, with the focus on movements in rupee as well as reaction from foreign investors after the latest tweaks undertaken by Indian authorities.
The RBI said all the new 15-year, 30-year and 40-year government bonds will be a part of so-called fully accessible route that allows unfettered foreign access.
At the same time, New Delhi exempted overseas investors from capital gains tax on interest or capital gains arising from sale of government bonds.
“Investors are likely to wait for clearer visibility on the global backdrop before committing meaningfully,” said Krishna Bhimavarapu, APAC economist at State Street Investment Management.
KEY INDICATORS ** India May retail inflation – June 12, Friday (4:00 p.m. IST) U.S. ** April international trade, June 9, Tuesday (6:00 p.m. IST) ** May existing home sales units – June 9, Tuesday (7:30 p.m. IST) ** May consumer price, core inflation – June 10, Wednesday (6:00 p.m. IST)(Reuters poll: 4.2%) ** Initial weekly jobless claims for the week to June 5 – June 11, Thursday (6:00 p.m. IST) ** May PPI machine manufacturing – June 11, Thursday (6:00 p.m. IST) ** June U-Mich sentiment prelim – June 12, Friday (6:00 p.m. IST)