By Dharamraj Dhutia and Nimesh Vora
MUMBAI (Reuters) – The Indian rupee’s direction this week will be shaped by the dollar’s reaction to its recent correction and whether worries over U.S. tariffs continue to subside, while the bond market will be on watch for any further liquidity infusion measures by the central bank.
The rupee ended at 86.8225 per U.S. dollar on Friday, having rallied 0.7% in the week in what was its best performance in more than one-and-a-half years.
That was largely due to the Reserve Bank of India’s heavy intervention, while an additional boost came from the lack of any U.S. tariffs implemented last week, as U.S. President Donald Trump had said would happen.
Kunal Kurani, associate vice president at Mecklai Financial, noted that after the rally, which likely squeezed out positions, the rupee is expected to more broadly track the dollar’s move.
The dollar index declined about 1% last week — and is down about 3% from the year-to-date high — as Washington’s reciprocal tariffs were not immediately imposed.
Kurani said any developments related to tariffs will remain in focus, which he cautioned, could stymie the rupee’s recovery.
The currency is expected to be in the range of 86.50-87.20, traders said.
While the rupee rallied, the benchmark 10-year bond yield was largely unchanged, ending at 6.7071% on Friday.
Traders expect the yield to trade in the 6.65%-6.75% range this week.
The narrow 6.68%-6.73% range last week was due to cautious sentiment after the RBI largely doused hopes of additional liquidity infusion.
The RBI cut interest rates by 25 basis points the week before but did not unveil fresh liquidity injection measures. Instead, its commentary was also on the cautious side, according to market participants.
“We retain a view of a 25 bps rate cut in the April meeting, followed by another cut later in the fiscal year (likely in October, even as we are more agnostic about the timing of that),” ICICI Securities Primary Dealership said in a note.
It added that the minutes of the RBI’s policy meeting, due on Friday, will provide more cues.
Over the past month, the central bank has infused 2.68 trillion rupees ($30.88 billion) into the banking system.
This includes 600.20 billion rupees of open market bond purchases, 388.15 billion rupees of secondary bond purchases, around 440 billion rupees via a dollar/rupee swap and 1.25 trillion rupees through a long-term repo.
It is scheduled to buy bonds worth 400 billion rupees on Thursday.
The market, however, is awaiting the next set of steps from the central bank, given that liquidity is set to tighten further in the run-up to the end of the financial year.
KEY EVENTS:
India
** February HSBC Flash manufacturing, services and composite PMI – February 21, Friday (10:30 a.m. IST)
** Minutes of Reserve Bank of India’s February monetary policy meeting – February 21, Friday (5:00 p.m. IST)
U.S.
** January housing starts – February 19, Wednesday (7:00 p.m. IST)
** Initial weekly jobless claims for week to February 10 – Feb. 20, Thursday (7:00 p.m. IST)
** February Philly Fed Business Index – February 20, Thursday (7:00 p.m. IST)
** February S&P Global Flash manufacturing, services and composite PMI – February 21, Friday (8:15 p.m. IST)
** January existing home sales – February 21, Friday (8:30 p.m. IST)
** February U Mich sentiment – February 21, Friday (8:30 p.m. IST) ($1 = 86.7890 Indian rupees)
(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Savio D’Souza)
