By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) -Traders will gauge likelihood of the Indian rupee extending its rally this week as reignited worries about U.S. trade tariffs, alongside lingering fiscal concerns hurt the dollar, while bond yields may move up after the central bank’s surplus transfer.
The rupee closed at 85.2125 on Friday, posting its biggest single-day gain in more than two years, and strengthened 0.3% week-on-week.
Alongside a rally in Asian currencies, heavy dollar sales from foreign banks and cutting of speculative bearish bets against the rupee contributed to the rally, traders said.
The dollar, meanwhile, weakened against most currencies on Friday after U.S. President Donald Trump recommended 50% tariffs on European Union imports from June 1 and said he was considering a 25% tariff on smartphones made outside the U.S.
The fresh tariff threats roiled global markets and deepened the dollar’s losses which ended down by about 1.8% on the week against major peers.
“Escalation – de-escalation and now re-escalation of President Trump’s war on trade is going to be the theme that drives markets next week,” ING Bank said in a note.
Back home, India’s January-March growth data, due on Friday, will be in focus. Year-on-year gross domestic product growth is expected to come in at 6.7%, per a Reuters poll.
In the near-term, the rupee is expected to face resistance to further gains near 84.94, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
U.S. Personal Consumption Expenditure (PCE) inflation data for April, due on Friday as well, may offer cues on the impact Trump’s tariff policies are having on prices in the world’s largest economy.
India’s 10-year benchmark 6.33% 2035 bond yield eased marginally last week, and ended at 6.2107% on Friday. Traders anticipate the yield to move in the range of 6.18%-6.26% this week.
The yield on the 6.79% government bond maturing in 2034 ended at 6.2520% on Friday.
The Reserve Bank of India’s board approved the transfer of 2.69 trillion rupees ($31.58 billion) as surplus for the fiscal year ended March, up from 2.11 trillion rupees last year.
Analysts’ estimates, however, had ranged between 2.7 trillion rupees and 4 trillion rupees. In fiscal year 2024, the RBI had transferred a surplus of 2.11 trillion rupees.
“We could see some upward move in the immediate aftermath on Monday, but major focus would shift on growth data,” a trader with a private bank said.
The RBI is largely expected to cut its key interest rate for a third consecutive time to 5.75% at its monetary policy meeting on June 6.
“With growth below potential and inflation durably aligned to target, we expect policy rates to be lowered into the accommodative zone. We expect an additional 100 bps of rate cuts to a terminal policy rate of 5.00% by end-2025, more than consensus,” Nomura economists said.
KEY EVENTS:
India
** April industrial output – May 28, Wednesday (4:00 p.m. IST)(Reuters poll – 2%)
** April fiscal deficit – May 30, Friday (3:30 p.m. IST)
** January-March GDP growth – May 30, Friday (4:00 p.m. IST)(Reuters poll – 6.7%)
U.S.
** April durable goods – May 27, Tuesday (6:00 p.m. IST)
** May consumer confidence – May 27, Tuesday (7:30 p.m. IST)
** January-March GDP second estimate – May 29, Thursday (6:00 p.m. IST)(Reuters poll -0.3%)
** Initial weekly jobless claims for week to May 19 – May 29, Thursday (6:00 p.m. IST)
** April personal consumption expenditure index, core PCE index – May 30, Friday (6:00 p.m. IST)
** May U Mich sentiment final – May 30, Friday (7:30 p.m. IST)
($1 = 85.1720 Indian rupees)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Varun H K and Rashmi Aich)
