By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) -The Indian rupee is expected to face continued pressure in the coming week, and traders will take cues from how forcefully the Reserve Bank of India defends the currency near its all-time low.
Bond yields will also track further RBI moves after bond purchases early this month, they said. The rupee closed at 88.7425 against the U.S. dollar on Friday, slightly down on the week as a persistently unfavorable skew in merchant and portfolio dollar flows was blunted by the central bank’s frequent market interventions. In the near-term, traders expect the currency to hover between 88.40 and 88.80, with a slight bias towards depreciation.
“As of now, USD/INR remains a sell on upticks. However, if 88.80 breaks, we could see the next leg of the upmove, which could result in the USD/INR range shifting higher,” FX advisory firm IFA Global said in a note. Meanwhile, a hawkish repricing of wagers on the U.S. Federal Reserve’s policy easing path may dampen global risk appetite, creating yet another headwind for the rupee.
Some policymakers at the Fed have signaled a preference towards keeping rates unchanged at the central bank’s policy meeting next month. Money markets are currently pricing in a less than 50% chance of a rate cut next month, down from over 60% last week.
The resumption of key U.S. economic data releases will be in focus this week alongside the minutes of the Fed’s October policy meeting due on Wednesday.
In the local market, India’s 10-year benchmark 6.33% 2035 bond yield settled at 6.5265% on Friday, marginally down week-on-week, giving up most of the declines that it witnessed during the week.
Traders expect the benchmark yield to stay in the 6.50% to 6.56% band this week, with eyes on the central bank’s next set of moves to support the market.
The RBI resumed purchase of government bonds after a gap of six months, and net bought bonds worth 124.70 billion rupees ($1.4 billion) in the week ending November 7.
Market participants had speculated on the RBI’s presence after data showed an investment category that includes the central bank buying a net 205 billion rupees of bonds in the week ended November 7.
“With the RBI engaging in on-screen purchases (indirect OMOs), there is a growing perception that current yield levels may be elevated, should macro conditions stabilize and the rate cut cycle resume, gilt funds could regain investor interest,” said Kruti Chheta, fund manager and fixed income analyst at Mirae Asset Investment Managers (India).
Meanwhile, a record low inflation could not convince swap market traders to expect a rate cut next month. The RBI policy decision is due on December 5 and even though many economists are batting for a rate cut, the OIS market has completely priced out any such move in December.
Foreign inflows into Indian bonds will also be under the radar, as they continued rising this month, after a large jump in October. These investors have net bought bonds worth 49.7 billion rupees in the first two weeks of November after $1 billion purchases in October. KEY EVENTS:
** India November HSBC manufacturing, services and composite Flash PMI – November 21, Friday (10:30 a.m. IST)
U.S. ** Initial weekly jobless claims for week to November 10 – November 20, Thursday (6:00 p.m. IST)
** November Philly Fed Business index – November 20, Thursday (7:00 p.m. IST) ** October existing home sales – November 20, Thursday (8:30 p.m. IST) ** November S&P Global manufacturing, services and composite Flash PMI – November 21, Friday (7:15 p.m. IST)
** November U-Mich sentiment – November 21, Friday (7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Harikrishnan Nair)
