Traders anticipate that the Indian rupee will face continued pressure in the upcoming week and will closely observe how aggressively the Reserve Bank of India defends the currency near its all-time low. Bond yields will also be monitored for further RBI actions post bond purchases earlier this month. The rupee concluded at 88.7425 against the U.S. dollar on Friday, experiencing a slight decline throughout the week due to a persistently unfavorable skew in merchant and portfolio dollar flows, offset to some extent by frequent market interventions from the central bank.
In the short term, traders foresee the currency fluctuating between 88.40 and 88.80, showing a slight inclination towards depreciation. According to FX advisory firm IFA Global, "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." Additionally, concerns arise from a hawkish shift in expectations regarding the U.S. Federal Reserve's policy easing trajectory, potentially dulling global risk appetite and adding another challenge for the rupee.
While some Fed officials have hinted at a preference for maintaining rates during the central bank's policy meeting next month, money markets currently reflect a less than 50% probability of a rate cut in December, reduced from over 60% the previous week. This week, the focus will be on key U.S. economic data releases and the minutes of the Fed's October policy meeting scheduled for Wednesday. In the local market, India's 10-year benchmark 6.33% 2035 bond yield settled at 6.5265% on Friday, marginally lower compared to the previous week, partially erasing the declines witnessed earlier.
Market participants expect the benchmark yield to range between 6.50% to 6.56% this week, closely monitoring the central bank's upcoming moves to bolster the market. The RBI reinitiated government bond purchases after a six-month hiatus, acquiring a net total of 124.70 billion rupees ($1.4 billion) in the week ending November 7. Speculations about the RBI's involvement arose following data indicating a net purchase of 205 billion rupees in the week ended November 7 by an investment category that includes the central bank.
Kruti Chheta, fund manager and fixed income analyst at Mirae Asset Investment Managers (India), highlighted the potential impact of the RBI's on-screen purchases (indirect OMOs) on current yield levels and future investor interest in gilt funds if macro conditions stabilize and the rate cut cycle resumes. Despite record low inflation rates, swap market traders are not anticipating a rate cut next month. The RBI's policy decision is scheduled for December 5, and while many economists advocate for a rate cut, the OIS market has completely ruled out such a move in December.
Furthermore, foreign inflows into Indian bonds will remain a focal point as they continued to rise this month following a significant increase in October. Investors in November have already net purchased bonds worth 49.7 billion rupees after acquiring $1 billion in October.
