is expected to rally this week after the central bank unveiled new measures to support the currency, including a special window for oil companies to buy dollars and tighter hedging rules.
Bond traders will focus on Monday’s September inflation data, and a firmer rupee could ease foreign investors’ worries about currency losses.
The rupee fell 0.4% last week to 96.73 per dollar on Friday, within striking distance of its all-time low of 96.96, hit in May.
Traders expect the rupee to strengthen past the 96-per-dollar mark, with gains potentially extending toward 95.50-95.00.
“Morning trade will see a sharp reaction, and it will likely be much more magnified than the one seen in NDF markets,” a trader at a foreign bank said. Traders expect the rupee to rally and dollar-rupee forward premiums to fall when markets open.
The rupee strengthened by about 0.6% against the dollar in the non-deliverable forward market after the measures were announced post local market hours.
In addition to the special window for oil-linked dollar demand, the central bank has tightened rules on speculative corporate activity and raised the cost of protection against further rupee weakness by introducing a cash reserve requirement for current account transactions above $2 million.
Global markets, meanwhile, will remain focused on developments in the Middle East while also tracking US consumer inflation data due to be released on Wednesday.
BONDS
Indian could face mild selling pressure as the government takes more steps to withdraw liquidity from the banking system.
Traders expect the benchmark yield to move in the 7.25% to 7.35% range, with an eye on US bond yields and oil prices.
India’s benchmark 10-year bond yield posted its eighth consecutive weekly rise, ending at 7.2994% on Friday, up 9 basis points for the week. It had jumped 45 bps in the last eight weeks, posting its longest rising streak in 13 months.
Bonds witnessed selling pressure after the RBI changed its policy stance to “calibrated tightening”, which hinted at a deeper-than-expected hiking cycle.
“Despite very strong economic momentum, the RBI need not embark on a pronounced hiking cycle. With one further hike followed by a period on hold, the RBI should get close to 1% real rate over 12-month horizon, which should be sufficient (to deliver a real policy rate of nearly 1% over a 12-month horizon),” Alessia Berardi, head of global macroeconomics and EM strategy at Amundi Investment Institute.
Foreign outflows from bonds have continued, with net sales in seven of the last eight weeks.
“Inflation pressures persist, and the modest rate increase is unlikely to materially affect flows,” said Shamaila Khan, head of fixed income for emerging markets and Asia-Pacific at UBS Asset Management.
KEY INDICATORS: India
** September retail inflation – October 12, Monday (4:00 p.m. IST) (Reuters poll: 5.40%)
** September wholesale inflation – October 14, Wednesday (12:00 p.m. IST) (Reuters poll: 10.18%)
** RBI to conduct debt sale worth 250 billion rupees – October 13, Tuesday
US
** September existing home sales – October 13, Tuesday (6:00 p.m. IST)
** September consumer price, core inflation – October 14, Wednesday (6:00 p.m. IST) (Reuters poll: 3.7%) ** Initial weekly jobless claims for the week to October 9 – October 15, Thursday (6:00 p.m. IST)
** September PPI machine manufacturing – October 15, Thursday (6:00 p.m. IST)
** September retail sales – October 15, Thursday (6:00 p.m. IST) ** October Philly Fed Business index – October 15, Thursday (6:00 p.m. IST)
** September import prices – October 16, Friday (6:00 p.m. IST)
** September industrial production – October 16, Friday (6:45 p.m. IST)