Rupee’s direction this week will hinge on whether lower oil prices hold and on the dollar’s trajectory, while government bonds are likely to take cues from the pace of foreign inflows.
The rupee rose 0.8% last week to 94.32, its best weekly performance in 11 weeks, helped by a drop in crude prices after the U.S.-Iran peace deal.
It briefly touched 94.18, its strongest level since May 7, before surrendering some gains as the dollar rallied on growing expectations that the Federal Reserve could raise rates later this year.
The Fed struck a more hawkish-than-expected tone on rates and inflation, prompting markets to reassess the policy path ahead.
“Oil had been the dominant driver for the rupee for some time. Now, the dollar is back in focus, which means you have to pay attention to incoming U.S. data,” said Kunal Kurani, vice president at Mecklai Financial.
Investors will focus on a string of U.S. economic data this week, including durable goods orders and the personal consumption expenditures (PCE) price index, for clues on the Federal Reserve’s policy path.
The dollar index rose 1.1% last week to its highest level in a year, while U.S. two-year Treasury yields climbed after the Fed’s policy update reinforced expectations of tighter monetary policy.
BONDS
The yield on India’s 10-year benchmark bond ended at 6.8533% on Friday, down 5 basis points for the week, posting its fourth consecutive weekly decline.
Bonds rose as oil prices slumped after the peace deal and as foreign inflows into securities continued, aided by the central bank’s measures two weeks ago.
Yields, however, gave up some of their declines on Friday and ended higher for the day on profit-booking.
U.S. President Donald Trump on Sunday threatened to restart war with Iran even as Vice President JD Vance met Iranian officials for the first talks under an interim peace deal, but Tehran announced it had again closed the Strait of Hormuz.
“While government bond yields could move lower in the near term, we do not expect a material or sustained decline,” said Anurag Mittal, senior executive vice president & head of fixed income, UTI AMC.
Traders expect the 10-year bond yield to move within a 6.80%-6.90% range this week, with the focus on oil prices and foreign flows. Foreign investors have bought 213.5 billion rupees ($2.26 billion) of bonds so far this month, most of it after the RBI’s June 5 measures to boost inflows. The purchases have already reached a 15-month high, with traders expecting further gains before month-end. “From the Asian bond investor’s perspective, India remains one of the higher-yielding investment-grade bond markets. It is highly liquid and significant progress has been made in its settlement process,” said Wontae Kim, portfolio manager at Western Asset Management. “Although geopolitical uncertainties and concerns about inflation have impacted investor sentiment, the recent developments are likely to give bond investors a cause for reconsideration.”
KEY FACTORS:
** India June HSBC manufacturing, services, and composite Flash PMI – June 23, Tuesday (10:30 a.m. IST)
U.S. ** June S&P Global manufacturing, services, and composite Flash PMI – June 23, Tuesday (7:15 p.m. IST) ** May new home sales units – June 24, Wednesday (6:00 p.m. IST) ** May personal consumption expenditure – June 25, Thursday (6:00 p.m. IST)
** May durable goods – June 25, Thursday (6:00 p.m. IST)
** January-March GDP final – June 25, Thursday (6:00 p.m. IST)
** Initial weekly jobless claims for the week to June 20 – June 25, Thursday (6:00 p.m. IST)
** June U Mich sentiment final – June 26, Friday (7:30 p.m. IST)