By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) -The Indian rupee is likely to hold a slightly positive bias this week, and alongside government bonds, will take cues from the Federal Reserve’s policy decision as well as developments on a U.S.-India trade deal and cross-border tensions.
The rupee closed at 84.58 on Friday, up 1% week-on-week on the back of portfolio inflows and gains in its regional peers.
The rupee rallied past 84 on Friday but was reined in by importer hedging demand and likely dollar-buying intervention by the central bank, traders said.
The dollar-rupee pair has likely bottomed out for the near term and could trade between 83.80 and 85, a trader at a foreign bank said.
The Reserve Bank of India “may continue to step in on dips below 84 (on USD/INR),” to shore up its foreign exchange reserves, the trader added. India’s forex reserves rose for the eighth consecutive week to a more than six-month high of $688 billion, as of April 25.
Meanwhile, the dollar rose against major peers on Friday after data showed that the U.S. economy added more jobs than expected last month, reflecting a resilient labor market amid uncertainty on the back of U.S. tariff policies.
The Fed is widely expected to keep rates unchanged this week but investors will pay close attention to Chair Jerome Powell’s comments for clues on how the economy may fare going forward.
Meanwhile, India’s benchmark 10-year bond yield ended at 6.3538% on Friday, having shed one basis point (bps) for the week. The yield has now eased for seven consecutive weeks posting an aggregate decline of 35 bps.
Traders expect the yield to hover between 6.30% and 6.40% this week, with the focus on debt purchases as well as any developments on the geopolitical front between India and Pakistan.
The yield’s recent downtrend has been due to expectations of further interest rate cuts as well as the central bank maintaining a banking system liquidity surplus with continuous open market bond purchases, called OMOs.
The RBI will buy bonds worth 750 billion rupees ($8.88 billion) this week, followed by two more purchases of 250 billion rupees later in the month.
So far this year, it has bought bonds worth 3.65 trillion rupees through OMOs and 388 billion rupees through secondary market debt purchases.
This unexpected liquidity injection is likely to aid policy transmission and support growth amid global uncertainties, said Radhika Rao, executive director and senior economist at DBS Bank.
It could also be a pre-emptive move to offset the liquidity drain from maturities in the RBI’s dollar-forward book in the next three months, Rao added. RATES India’s overnight index swap rates are expected to consolidate in early part of the week, and could react more after the Fed policy statement.
The one-year, two-year and most liquid five-year swap rates have dropped sharply in the last five weeks.
KEY EVENTS:
** India April HSBC services and composite PMI – May 6, Tuesday (10:30 a.m.)
** Bank of England rate decision – May 8, Thursday (Reuters poll: No change expected)
U.S.
** April S&P global composite PMI final – May 5, Monday (7:30 p.m. IST)
** April S&P global services PMI final – May 5, Monday (7:30 p.m. IST)
** April ISM non-manufacturing PMI – May 5, Monday (7:30 p.m. IST)
** March international trade – May 6, Tuesday (6:00 p.m. IST)
** Federal Reserve monetary policy decision – May 7, Wednesday (11:30 p.m. IST)(Reuters poll: no change)
** Initial weekly jobless claims week to April 28 – May 8, Thursday (6:00 p.m. IST)
($1 = 84.4990 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Savio D’Souza)
