Indian rupee traders eye turbulence after RBI tightens FX positions caps, oil surge to hurt bonds
Traders in the Indian foreign exchange market brace for a volatile week after the central bank tightened limits on lenders' net open FX positions, while surging oil prices are expected to keep government bonds under pressure.
The rupee fell about 1% last week, its fourth consecutive weekly decline of a similar magnitude, to hit a record low of 94.84 against the dollar.
After market hours on Friday, the central bank said that banks must ensure that by April 10 their net open rupee positions in the onshore deliverable market do not exceed $100 million at the end of each business day.
Bankers have said that the short deadline could trigger disorderly unwinding of positions and potential losses on arbitrage positions.
"The market is likely to be volatile and with traders worried about closing arbitrage positions, one can expect that the RBI may remain active in both NDF and the onshore market," a trader at a state-run bank said.
Meanwhile, Brent crude oil futures rose 3% on Monday to nearly $116 per barrel as investors braced for a protracted conflict in the Middle East.
BONDS
A selloff in Indian government bonds drove them to their worst week in almost four years.
The benchmark 10-year yield rose 20 basis points last week to end at 6.9419% on Friday, its biggest weekly jump since May 2022, when the central bank had gone ahead with an off-cycle rate hike.
Traders anticipate the yield to move in a 6.87% to 6.95% range in a week that consists of just two trading sessions, including the last day of the current fiscal year.
Rising oil prices and New Delhi's move to cut some excise duty on fuel have muddied fiscal and growth outlook, adding more pressure on bonds.
The benchmark Brent crude contract has gained more than 50% in the last four weeks since the war started.
"India, as a net importer of energy and commodities, remains sensitive to these market shifts. Having proactively reduced our duration exposure several months ago, we see no immediate justification to increase it, nor do we intend to scale back further at this stage," said Vidya Iyer, head fixed income at ICICI Prudential Life Insurance.
Still, there could be some relief rally after the government unveiled plans to frontload only 51% of its gross borrowing for fiscal 2027, which works out to be 8.20 trillion rupees, against market expectations of 53%-56%.
Overnight index swap rates have surged by 55-69 bps in the last four weeks, and even as the derivative asset class is factoring more than two rate hikes, analysts say the market is overestimating the impact of Iran war on domestic monetary policy.
KEY EVENTS:
India ** February industrial output - March 30, Monday (4:00 p.m. IST)** February fiscal deficit - March 31, Tuesday (3:30 p.m. IST)
** March HSBC manufacturing PMI - April 2, Thursday (10:30 a.m. IST) U.S.
** March consumer confidence - March 31, Tuesday (7:30 p.m. IST) ** February retail sales - April 1, Wednesday (6:00 p.m. IST) ** March S&P Global manufacturing PMI final - April 1, Wednesday (7:15 p.m. IST) ** March ISM manufacturing PMI - April 1, Wednesday (7:30 p.m. IST)
** February international trade, April 2, Thursday (6:00 p.m. IST)
** Initial weekly jobless claims for week to March 28 - April 2, Thursday (6:00 p.m. IST) ** March non-farm payroll and unemployment rate – April 3, Friday (6:00 p.m. IST) ** March S&P Global composite PMI final – April 3, Friday (7:15 p.m. IST)
** March S&P Global services PMI final - April 3, Friday (7:15 p.m. IST)
