Indian rupee to take cues from Asian peers; bond, currency traders eye RBI decision

The Indian rupee is likely to track moves in major Asian currencies this week, while bond and currency traders will keep an eye on the Reserve Bank of India’s (RBI) monetary policy decision due on Friday.

The rupee ended slightly lower at 83.40 on Thursday, but was little changed week-on-week as likely intervention from the RBI curbed losses in the local unit, which was pressured by dollar demand from companies and debt-related outflows.

Indian currency and debt markets were closed on Friday and Monday.

Most Asian currencies slipped on Monday while the dollar index was steady near 104.5.

The rupee is likely to trade with a “slightly negative bias” this week, given the recent moves and elevated crude oil prices, Dilip Parmar, a foreign exchange research analyst at HDFC Securities said.

The currency is expected to trade in a range of 83.25 – 83.50 this week.

The RBI will deliver its monetary policy decision on Friday and the central bank is expected to keep interest rates unchanged amid strong growth and still-elevated inflation, according to a Reuters poll of economists.

Meanwhile, U.S. personal consumption expenditure (PCE) inflation came in as expected last week, with Federal Reserve Chair Jerome Powell saying the data was “along the lines of what we would like to see”.

Odds of a Fed rate cut in June rose following the data. The U.S. non-farm payrolls report, due on Friday, will be the next key trigger that could impact expectations about when the Fed might begin easing rates.

The 10-year Indian government bond yield settled at 7.0556% on Thursday, after falling 26 basis points in the fiscal year that ended March 31.

Yields slipped last week as the government’s planned borrowing for April-September, at 7.50 trillion rupees ($89.98 billion), was lower than expected.

Traders expect the 10-year yield to move in a 7.00%-7.08% range this week, until the central bank’s policy decision.

At the policy meeting, traders will watch out for commentary on banking system liquidity and inflation management, even as some expect a change in the policy stance.

“A probable explicit or implicit change in stance cannot be ruled out. We expect growth projections to remain robust and the RBI is expected to touch upon smoothening of liquidity conditions,” said Parijat Agrawal, head of fixed income at Union Mutual Fund.

Treasury officials expect a steepening of India’s bond yield curve due to a cut in the supply of shorter-tenor papers.

At the same time, hefty borrowings by states in April-June could weigh on sentiment. States plan to raise a higher than expected 2.54 trillion rupees through bonds during the quarter.

Still, Indian mutual funds may continue buying state bonds as the yield spreads with federal bonds ease, according to fund managers.

KEY EVENTS:

** HSBC India Jan manufacturing PMI – April 2, Tuesday (10:30 a.m. IST)

** U.S. Feb factory orders – April 2, Tuesday (7.30 p.m. IST)

** U.S. March S&P Global services and composite PMI – April 3, Wednesday (7:15 p.m. IST)

** U.S. March ISM non-manufacturing PMI – April 3, Wednesday (7:30 p.m. IST)

** U.S. April-June overall comprehensive risk – April 3, Wednesday (10.30 p.m. IST)

** HSBC India Jan services PMI – April 4, Thursday (10:30 a.m. IST)

** U.S. Feb international trade GDP – April 4, Thursday (6:00 p.m. IST)

** U.S. initial weekly jobless claims week to March 30 – April 4, Thursday (7:00 p.m. IST)

** India April-June overall comprehensive risk April 5, Friday (8:30 a.m. IST)

** India policy rate decision – April 5, Friday (10:00 a.m. IST) (rates expected to remain unchanged)

** U.S. March non-farm payrolls and unemployment rate – April 5, Friday (7:00 p.m. IST)

($1 = 83.3560 Indian rupees)