India rupee seen under pressure, bonds to track US peers
The Indian rupee may remain pressured this week by a broadly stronger U.S. dollar after the Federal Reserve forecast fewer rate cuts next year, while government bond yields will track moves in Treasuries.
The rupee hit a record low of 85.10 against the dollar on Friday and closed down 0.2% for the week, its seventh consecutive weekly decline. [INR/]
Interventions by the Reserve Bank of India (RBI) supported the currency, while its regional peers fell as much as 1.2%, sending emerging market central banks scrambling to stabilise their currencies.
The dollar index rose 0.8% last week, its third straight weekly rise. It hit a two-year high on Wednesday, but retreated from those levels after data on Friday showed core U.S. personal consumption expenditure price index rose 0.1% month-on-month in November, lower than the 0.2% rise anticipated by economists.
With the U.S. economic data calendar relatively light heading into the year-end, traders expect the rupee will be largely influenced by foreign portfolio flows alongside the dollar's trajectory.
The rupee is likely to hover between 84.90 and 85.40 this week, according to traders. While a runaway move is unlikely, "the RBI will look to spend its (foreign exchange) reserves judiciously and, therefore, if we see continued dollar strength, we may see steady depreciation of the rupee," said Abhishek Goenka, CEO at forex advisory firm IFA Global.
India's foreign exchange reserves declined to a near six-month low of $652.9 billion in the week ended Dec. 13, according to central bank data.
The reserves have fallen by $52 billion from a record high of $704.89 billion hit in late-September amid frequent RBI interventions to support the local currency.
Meanwhile, the benchmark 10-year bond yield ended at 6.7891% last week, up by six basis points as a bearish grip tightened on the market after the Fed's hawkish rate projections for 2025.
Traders expect the yield to remain in the 6.75%-6.80% range this week, with the focus on Treasury yields. The U.S. 10-year yield hit its highest level in nearly seven months last week after the Fed's forecast.
"Indian bond yields have largely been following U.S. yields in the near term and with tight liquidity conditions, I see some upside pressure on the rates in India till liquidity eases," said Alok Singh, group head of treasury at CSB Bank.
Meanwhile, members of India's rate-setting panel said high prices are the cause for demand slowdown, and aligning inflation to the central bank's 4% target is key to ensuring sustained economic growth, according to the minutes of the December meeting.
Earlier this month, the RBI kept its key interest rate unchanged but infused liquidity in the banking system through a 50 basis points cut in banks' cash reserve ratio.
