22-04-2024 09:02 AM | Source: Reuters
Indian forex, bond investors eye Middle East developments, US inflation

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India's rupee and government bonds will move this week based on developments in the Middle East crisis as well as a key U.S. inflation gauge that will impact the interest rate outlook.

The rupee dropped to a record low of 83.5750 to the U.S. dollar on Friday amid worries over a wider conflict in the Middle East and expectations that U.S. interest rates are likely to remain higher for longer.

The currency fell 0.1% in the week to end at 83.47, and the losses would have been larger had it not been for the Reserve Bank of India's (RBI) intervention.

The rupee should trade in a 83.25 to 83.75 range this week, traders said.

Emerging market currencies have come under pressure on concerns of a wider fallout of the Israel-Iran skirmishes.

"I would think that if there is more negative news on Middle East, RBI would be intervene heavily again based on how it has been in recent days," Kunal Kurani, associate vice president at Mecklai Financial, said.

The hawkish tone of Federal Reserve policymakers has prompted investors to dial back interest rate cut expectations.

U.S. core personal consumption expenditures price index, the Fed's preferred inflation measure, is due on Friday and will be watched for cues on the rates path ahead of a policy decision next week.

Meanwhile, the 10-year Indian government bond yield ended at 7.2278% on Friday, gaining 5 basis points in the week, after rising 11 bps in two previous weeks.

Traders expect the benchmark bond yield to move in a 7.16%-7.27% range this week.

Bond yields have been on an uptrend, tracking upward trajectory in U.S. yields as well as oil prices.

Treasury yields have risen as markets are now expecting fewer than 50 basis points of rate cuts in 2024.

Still, the recent rise in Indian bond yields has investors scouting for value as yields are seen easing later this year despite the local central bank holding rates, treasury officials have said.

"The benchmark bond yield may not rise much above 7.23%-7.25% levels," VRC Reddy, treasury head at Karur Vysya Bank said.

DBS Bank expects the benchmark yield to slip below 7% in July-December. As Indian government bonds have "low beta" to global bond movements, it is a good diversification trade for international debt market investors, the bank said.

KEY EVENTS: ** U.S. April S&P Global manufacturing, services and composite PMI - April 23, Tuesday (7:15 p.m. IST)

** U.S. March new home sales - April 23, Tuesday (7:30 p.m. IST) ** U.S. March durable goods - April 24, Wednesday (6:00 p.m. IST)

** U.S. initial weekly jobless claims week to April 15 - April 25, Thursday (6:00 p.m. IST)

** U.S. January-March advance GDP - April 25, Thursday (6:00 p.m. IST) (Reuters poll 2.1%) ** U.S. March personal consumption expenditure, core PCE index - April 26, Friday (6:00 p.m. IST)

** U.S. April U Mich sentiment - April 26, Friday (7:30 p.m. IST)