By Dharamraj Dhutia and Nimesh Vora
MUMBAI, Sept 7 – The Indian rupee‘s direction this week will hinge on whether the Reserve Bank of India sustains its dollar-selling intervention, with oil prices and U.S. interest rate expectations providing the key global cues for currency and bond markets.
The rupee rose 0.9% last week, touching its highest level in two months before settling at 94.4850 per dollar, supported by persistent RBI intervention and expectations that the central bank will deploy its larger FX reserves to boost the currency.
“The RBI is the biggest factor now. Last week, it kept insulating the rupee from negative cues, and the question now is whether it will follow through,” said Anil Bhansali, head of treasury at Finrex Treasury Advisors.
The rupee will begin the week facing a higher probability of a Federal Reserve rate hike at this month’s meeting, after robust U.S. jobs data pushed Treasury yields higher. Nonfarm payrolls rose by 162,000 last month, well above the 56,000 increase expected by economists polled by Reuters.
Focus now turns to U.S. inflation data, with the August consumer price report due on Friday evening, just days before the Federal Reserve’s policy meeting.
The data could sway bets on the Fed’s policy decision, with market expectations currently finely balanced.
Oil prices will also be in focus after Brent crude surged 7.8% to a six-week high, with investors closely watching any escalation in U.S.-Iran tensions and its impact on supplies.
BONDS
Indian government bonds are likely to trade with a negative bias this week after the benchmark yield posted a third consecutive weekly rise.
The 10-year bond yield ended at 6.9625% on Friday, up 5 basis points for the week, after climbing about 15 bps over the previous two weeks.
Traders expect the benchmark yield to move in the 6.90% to 7.00% range, with focus on oil prices and the RBI’s steps to manage rupee liquidity.
Shorter-duration bonds remained supported after banking system liquidity rose above 10 trillion rupees ($105.84 billion) for the first time ever.
However, the swelling surplus has fuelled expectations that the RBI may have to take durable steps to withdraw cash from the system.
The RBI will conduct a 30-day variable rate reverse repo auction worth 7 trillion rupees on Monday, with an early redemption option aimed at encouraging banks to park excess funds while retaining flexibility to withdraw them.
Sentiment in the bond market has been further dampened by a spike in oil prices and higher U.S. Treasury yields.
Those global factors have not, however, erased the appeal of Indian government bonds for some fund managers.
“Indian government bonds appear relatively attractive on both fundamental and valuation grounds,” said Matthew Kok, fixed income portfolio manager at Eastspring Investments.
“Relatively stronger growth prospects, improved currency and bond price stability, and the removal of withholding tax have enhanced their relative appeal compared with the local currency bonds of their regional peers.” KEY INDICATORS: U.S.
** Initial weekly jobless claims for the week to September 5 – September 10, Thursday (6:00 p.m. IST) ** August PPI machine manufacturing – September 10, Thursday (6:00 p.m. IST) ** August existing home sales – September 10, Thursday (7:30 p.m. IST) ** August consumer price, core inflation data – September 11, Friday (6:00 p.m. IST) (Reuters poll: 3.4%)
** September U Mich sentiment prelim – September 11, Friday (7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Eileen Soreng and Subhranshu Sahu)
