India rupee, bonds to sway to Fed tone, foreign flows
The Indian rupee's outlook and government bond movements this week will hinge on the U.S. Federal Reserve's commentary following a widely anticipated rate cut, as well as the quantum of overseas flows.
Markets have fully priced in a 25-basis-point rate cut at the U.S. Fed's October 28–29 meeting and will watch for guidance on the policy path beyond October amid expectations of further incremental cuts.
The dollar has weakened considerably and will continue to weaken, which means emerging markets and their currencies will have their day in the sun, said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis.
"This has clearly benefited Indian assets (bonds and equities), and we expect these flows to continue," Gijsels said.
The Indian rupee which has risen 1% against the dollar over the last two weeks, bolstered by the Reserve Bank of India's dollar sales, remains supported near the 88 level, bankers said.
"I think the 88 level marks the near-term top for dollar/rupee," Kunal Kurani, assistant vice president at Mecklai Financial said.
"With that in place, how flows evolve on the importer and exporter side will be key."
Kurani expects the rupee to trade in a 87.50 to 87.90 range this week against Friday's close of 87.8450.
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield settled at 6.5345% on Friday, up 2 points week-on-week on uncertainty over the RBI's interest rate trajectory amid optimism that India could strike a trade deal with the U.S., which would cushion the impact on growth.
Traders expect the benchmark yield to stay in the 6.51% to 6.58% band this week, with few catalysts apart from the Fed's policy outlook.
A majority of market participants have been anticipating an India rate cut in December, while Nomura, Capital Economics and MUFG predict another reduction in February, which will take the repo rate to 5%.
Meanwhile, foreign inflows into Indian government bonds are on the rise, nearing $1 billion for the third consecutive month.
Traders say sustained inflows into bonds could be the next key trigger if rate cuts go off the table.
KEY FACTORS: India
** September industrial output - October 27, Monday (4:00 p.m. IST) ** September fiscal deficit - October 31, Friday (3:30 p.m. IST) U.S. ** September durable goods - October 27, Monday (6:00 p.m. IST) ** October consumer confidence - October 28, Tuesday (7:30 p.m. IST) ** Federal Reserve Monetary policy decision - October 29, Wednesday (11:30 p.m. IST)(Reuters poll - 25 bps rate cut)
** July-September initial estimate of GDP growth - October 30, Thursday (6:00 p.m. IST)(Reuters poll - 3.00%)
** September personal consumption expenditure index, core PCE index - October 31, Friday (6:00 p.m. IST)
