The Indian rupee and government bonds are expected to depend heavily on the Reserve Bank of India (RBI) for support this week, as the currency hovers near its record low and a key bond yield faces pressure. The central bank’s frequent dollar sales have been instrumental in stabilising markets.
The rupee ended the previous week at 88.66 against the US dollar, registering a slight weekly gain of 0.1 per cent. This stability was largely attributed to the RBI’s actions, which countered headwinds from modest foreign investor flows, consistent dollar demand from local importers, and a resurgent US currency. India’s foreign exchange reserves fell by USD 5.6 billion to USD 689.7 billion as of 31 October, underscoring the scale of the central bank’s efforts.
Traders predict the rupee will trade between 88.40 and 88.80 this week, with a slight tendency to weaken. The US dollar index itself concluded the week at 99.5, as markets evaluated the likelihood of a US Federal Reserve interest rate cut. “With the US government shutdown ongoing, we are still in the dark about the true labour market picture,” analysts at ING noted, expecting the dollar to consolidate.
In the bond market, the ten-year benchmark bond yield settled at 6.5142 per cent, showing little change from the week before. Market sentiment was balanced between substantial purchases, believed to be from the RBI, and selling pressure from state-run banks. Traders anticipate the benchmark yield to remain between 6.48 per cent and 6.55 per cent, with the central bank’s potential actions being a primary factor.
The RBI’s engagement with the market has been active. Investors from the ‘others’ category bought bonds worth a net 205 billion rupees last week, with participants speculating the central bank was the major buyer. Furthermore, traders estimate the RBI held 20-25 per cent of a one trillion rupee bond that matured recently and likely purchased more to replenish its holdings.
The central bank also held discussions with select market participants, where traders proposed that the RBI should increase its purchases of government debt to alleviate 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. He added that upcoming inflation data and softer-than-expected GDP growth could influence the RBI’s policy stance.
All eyes are now on India’s consumer price index (CPI) inflation data, due on 12 November. A Reuters poll forecasts a significant slowdown to 0.48 per cent in October, down from 1.54 per cent in September, which would mark the lowest level in the current data series. Market participants will also monitor foreign inflows into bonds, which decelerated last week after robust purchases of USD 1.5 billion in October.
