By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) -The Indian rupee and government bonds will yet again count on market interventions by the Reserve Bank of India this week, to help keep the currency above its record low and protect the benchmark bond from falling sharply.
The rupee closed at 88.66 against the U.S. dollar, up 0.1% on the week, supported by multiple dollar-selling interventions by the central bank.
Lacklustre foreign portfolio flows, persistent dollar demand from local importers and renewed strength in the greenback have proven to be headwinds for the rupee over the last few weeks.
Traders expect the currency to hover in the 88.40-88.80 range this week with a modest bias towards depreciation. Data released on Friday showed that India’s foreign exchange reserves declined by $5.6 billion to $689.7 billion as of October 31.
The dollar index, meanwhile, ended the week at 99.5, down slightly on the week, as investors weighed the odds of a U.S. Federal Reserve rate cut in December amid a hawkish tilt in policymakers’ commentary and lingering concerns over the health of the U.S. economy.
“With the U.S. government shutdown ongoing, we are still in the dark about the true labour market picture,” analysts at ING said in a note. They expect the dollar to consolidate in the near-term.
Meanwhile, India’s 10-year benchmark 6.33% 2035 bond yield settled at 6.5142% on Friday, largely unchanged week-on-week, as large purchases from a particular investment category was met with selling pressure, mainly from state-run banks.
Traders expect the benchmark yield to stay in the 6.48% to 6.55% band this week, with few catalysts aside from potential central bank actions to support sentiment.
Investors from the so-called others category bought bonds worth 205 billion rupees on a net basis last week, with market participants guessing that the Indian central bank purchased a bulk of the bonds.
According to traders, the RBI owned around 20-25% of around 1 trillion rupees of 5.15% 2025 bond that matured on Friday, adding that the central bank must have bought more to replenish the maturing security.
The RBI had also met select market participants last week, where traders suggested the central bank must step in to buy government debt to ease pressure.
“RBI’s communication and potential announcement of a structured open market purchase calendar will be critical for market sentiment,” said Abhishek Bisen, head of fixed income at Kotak Mahindra Mutual Fund.
“Upcoming inflation data which is expected to be negative for the first time in a while, and softer-than-expected GDP growth could influence RBI’s policy stance.”
India’s retail inflation, due on Wednesday, is expected to have slowed more than a full percentage point to 0.48% in October from 1.54% in September, according to a Reuters poll. This would be the lowest level in the current 2012-base series.
Market participants will also keep an eye on foreign inflows in bonds, which slowed down last week after $1.5 billion purchases in October.
KEY EVENTS:
India
** October CPI inflation – November 12, Wednesday (4:00 p.m. IST) (Reuters poll 0.48%)
** October WPI inflation – November 14, Friday (12:00 p.m. IST) (Reuters poll -0.60%) U.S. ** Initial weekly jobless claims for week to November 3 – November 13, Thursday (6:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Janane Venkatraman)
