Struggling Indian rupee to navigate Fed policy; bonds seen supported ahead of budget
Written by Dharamraj Dhutia and Nimesh Vora
MUMBAI, Jan 27 (Reuters) – The heavily pressured Indian rupee is heading into a week when the U.S. Federal Reserve will announce its first policy decision of the year, while local government bonds appear to be supported as the country approaches its annual budget.
The rupee fell nearly 1.2% last week, its sharpest decline in six months, after touching an all-time low of 91.9650.
While stock outflows accelerated over the past week, importer hedging was higher than that of exporters amid expectations of further depreciation. Exceeding the 91 per dollar level increased speculative interest and increased dollar demand.
“The rupee’s downward trend should continue solidly this week as well, as these pressures are unlikely to ease in the near term,” said Kunal Kurani, vice president at Mecklai Financial.
Beyond flows, the rupee will have to navigate two key events in the week, starting with the Fed’s policy decision on Wednesday.
With no change in interest rates expected, traders will be scrutinizing the Fed’s statement and Chairman Jerome Powell’s press conference for signals on the timing of future rate cuts.
India’s annual budget is scheduled for Sunday, but traders expect limited preemptive positioning in the currency.
Meanwhile, in a positive development for the rupee this week, India and the European Union completed negotiations on a long-coveted trade deal; This agreement, welcomed by both sides, was a historic agreement amid tense US relations.
BONDS
The 10-year benchmark 6.48% 2035 yield settled at 6.6635% on Friday, falling marginally after rising for the previous three weeks as supply outpaced demand.
Investors expect yields to move in the 6.61%-6.70% range this week.
Bonds could see a positive start after the RBI announced another liquidity infusion plan, which will buy bonds worth 1 trillion rupees and carry out a $10 billion swap in February.
The market will look for clues from the government to address the worsening supply-demand scenario.
The focus will be on the gross borrowing announcement and whether New Delhi plans to increase net treasury bill issuance.
A Reuters poll puts gross borrowing for the next fiscal year at a record 16.27 trillion rupees, while Nomura expects the figure to be 17.5 trillion rupees.
“On the fiscal front, we see consolidation continuing albeit at a slower pace and expect the FY27 fiscal deficit to peg at 4.25%-4.30%,” said Vikas Garg, head of fixed income at Invesco Mutual Fund.
“The market will closely monitor the financing pattern of the fiscal deficit and we expect the rate of small savings programs and treasury bill issuance to increase for FY27.”
