By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee and its Asian peers will be influenced by developments surrounding U.S. President-elect Donald Trump’s inauguration on Monday, with traders keenly focussing on trade tariff measures, while bond yields will track Treasury yields.
The rupee closed at 86.61 against the U.S. dollar on Friday, having lost 0.75% for the week, its steepest weekly fall since July 2023.
The greenback’s strength, persistent foreign portfolio outflows and concerns about India’s slowing economic momentum have hurt the rupee over the last couple of months. It has slid 3% since Trump won the U.S. election in November.
Trump will take charge as U.S. President on Monday and traders reckon that any policy step that weakens the Chinese yuan could hurt the rupee as well. He has already proposed hefty tariffs on Chinese goods.
“Long USD positions have become a very crowded trade, leaving it vulnerable to a correction lower if market expectations for initial policy implementation under Trump disappoint,” MUFG Bank said in a note.
The dollar index ended lower by 0.2% last week, snapping a six-week winning streak.
With the focus squarely on Trump’s return to the White House, the rupee declining below 87 this week “is not out of the question,” a senior trader at a private bank said. How swiftly the Reserve Bank of India responds to such pressure would also be key to watch, he added.
Meanwhile, India’s benchmark 10-year bond yield ended at 6.7653% on Friday. While the weekly drop was marginal, it masked the volatility that spurred a 13-basis-point movement on the yield.
The yield had hit a more-than-two-month high of 6.8689% last week.
Traders expect the Indian 10-year bond yield to be in the 6.72%-6.85% range this week, with the focus on Treasury yields and any immediate fallout once Trump assumes charge.
“If there is another flare-up in Treasury yields, we could again test the highs that were witnessed last week,” a trader with a primary dealership said.
Meanwhile, in the run-up to India’s federal budget on Feb. 1, the focus will also remain on the evolving banking system liquidity conditions as well as foreign purchases of government bonds.
Last week, the Reserve Bank of India said it would conduct daily overnight variable rate repos (VRRs) to infuse liquidity in the banking system.
“This measure will help keep overnight rates more consistently near the repo rate. This is positive for near-term government bonds,” said Gaura Sen Gupta, India economist at IDFC FIRST Bank.
“Longer duration bonds will depend on supply and rate-cut expectations. The overnight VRR should not have that much impact.”
Foreign inflows that were expected into government bonds over the next two-and-a-half months will fall short of expectations, stymied by the declining currency and rising U.S. yields.
“The recent fall in the rupee and rise in U.S. bond yields could potentially slow down passive inflows into India,” said Manish Bhargava, CEO at Straits Investment Management.
KEY EVENTS:
** U.S. initial weekly jobless claims week to Jan. 13 – Jan. 23, Thursday (7:00 p.m. IST)
** India January HSBC Flash manufacturing, services and composite PMI – Jan. 24, Friday (10:30 a.m. IST)
** U.S. January S&P Global Flash manufacturing, services and composite PMI – Jan. 24, Friday (8:15 p.m. IST)
** U.S. December existing home sales – Jan. 24, Friday (8:30 p.m. IST)
** U.S. January U Mich sentiment – Jan. 24, Friday (8:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D’Souza and Rashmi Aich)
