Indian rupee to track merchant flows, dollar; bonds await foreign buying cues
The Indian rupee is expected to remain sensitive to merchant and portfolio flows this week and broadly track the dollar's trajectory, while government bonds will be driven by foreign purchases as well as any updates on index inclusion. The rupee declined nearly 1% last week to close at 95.21 per dollar on Friday, finding modest comfort in on the week's final trading session as the dollar retreated with expectations of near-term rate hikes in the United States. Traders expect the rupee to hover in the 94.80-95.80 per dollar range this week with a pickup in exporter activity or foreign portfolio flows into local stocks seen as key for sustained appreciation. On the other hand, intermittent maturities of non-deliverable forward contracts could expose the currency to bouts of weakness, possibly drawing central bank intervention.
Analysts at Goldman Sachs said FX carry strategies can continue to deliver positive total returns even with further repricing of the U.S. Federal Reserve's expected rate path. The Indian rupee is among the key carry candidates, they said in a note, "although it also has more limited scope for spot appreciation." Elsewhere, the Fed's June meeting minutes and any potential Japanese FX intervention are expected to dominate an otherwise quiet week as global markets enter the Northern Hemisphere summer lull. BONDS
Government bonds continued their upward momentum last week as unwavering purchases from foreign investors and easing oil prices aided sentiment.
The 10-year benchmark yield ended at 6.7108% on Friday, down 6 basis points for the week, its sixth consecutive weekly decline. It has plunged 34 bps over the last six weeks.
Foreign investors have increased their bond purchases, betting that Indian bonds may soon be added to the Bloomberg Global Aggregate Index.
Traders expect the benchmark yield to move within the 6.70%-6.78% range this week, as some traders will look to book profits if the Bloomberg announcement doesn't materialize.
In its January review, Bloomberg said they would release their next update in the middle of 2026.
Foreign investors have bought a net 346 billion rupees ($3.6 billion) under the Fully Accessible Route (FAR) which allow unfettered investments and are a part of three emerging market debt indexes in five weeks since June 1.
"Looking ahead, a formal inclusion of Indian government bonds in the Bloomberg Global Aggregate Index could provide an additional catalyst for foreign inflows in the short term," said Harsimran Sahni, head of treasury at Anand Rathi Global Finance.
"The appreciation of rupee has also provided greater comfort to overseas investors. A more stable currency outlook has enhanced the appeal of domestic fixed-income assets, leading to increased demand in the 10-year security as well as other securities at the longer end of the curve." KEY FACTORS: U.S. ** June S&P Global composite and services PMI final - July 6, Monday (7:15 p.m. IST)
** June ISM non-manufacturing PMI - July 6, Monday (7:30 p.m. IST) ** May international trade - July 7, Tuesday (6:00 p.m. IST)
** Initial weekly jobless claims for the week to July 4 - July 9 4, Thursday (6:00 p.m. IST)
** June existing home sales - July 9, Thursday (7:30 p.m. IST)
($1 = 95.2100 Indian rupees)
