Oil price plunge on US-Iran peace hopes to give rupee, bonds some breather
The Indian rupee and government bonds this week will be comforted by a drop in oil prices even as shipping through the Strait of Hormuz remains at a standstill, days before a ceasefire between the United States and Iran is set to expire.
Brent crude oil prices fell sharply on Friday and could experience fresh volatility this week after U.S. President Donald Trump said his envoys would return to Pakistan for fresh talks with Iran, while threatening attacks on Iran's bridges and power plants unless it accepts his terms.
Amid the uncertainty, traders expect the rupee to to be rangebound this week after closing at 92.9250 against the dollar on Friday, down 0.2% week-on-week.
Regulatory measures by the central bank have helped steady the currency after it hit a record low past the 95 handle in late-March.
Traders expect the currency to hover in a 92.50-93.50 band in the near term with price-action expected to be dependent on merchant and portfolio flows.
Overseas investors have next sold over $6 billion of Indian equities and bonds over April so far, parking the year-to-date outflows at nearly $19 billion.
"Structural pressures from a widening current account deficit and persistently high portfolio outflows are expected to keep the INR under pressure going forward," analysts at ING said in a note.
While the data calendar is relatively light this week, investors will keep an eye out for the minutes of the Reserve Bank of India's April policy meeting for cues on how policymakers' think the Iran war may impact the country's economy.
BONDS
The benchmark 10-year yield ended marginally lower on Friday at 6.9049% in a choppy week, with investors not only hoping for a resolution between the U.S. and Iran but also concerned over restarting oil supplies.
The benchmark Brent crude contract was around $90 per barrel, on back and forth for restarting supplies through the Strait of Hormuz, responsible for nearly a fifth of global transit.
Higher oil prices threaten to cloud import-dependent India's inflation and growth outlook.
A week ago, the yield dropped 22 basis points, the biggest weekly fall since October 2019. Traders expect the yield to move in a 6.85%-7.00% range this week.
Markets will also be on the lookout for reaction from foreign investors, who remained on the selling side since the start of the war on February 28 and have sold bonds worth around 200 billion rupees on a net basis since then, clearing house data showed.
The Middle East war and the subsequent rise in energy prices and concerns over supply have affected sentiment towards global inflation and growth outlook, and more specifically towards oil importers like India, said Alaa Bushehri, head of emerging market, fixed income and emerging market corporates at BNP Paribas Asset Management.
"With this macro backdrop, a more cautious approach would be taken towards jurisdictions most affected by this higher energy environment."
Traders will also await minutes of RBI's latest meeting wherein the authority had maintained rates and its stance. KEY FACTORS
India ** Minutes of RBI's April monetary policy meeting - April 22, Wednesday (5:00 p.m. IST)
** April HSBC manufacturing, services, and composite Flash PMI - April 23, Thursday (10:30 a.m. IST) U.S. ** March retail sales - April 21, Tuesday (6:00 p.m. IST) ** Initial weekly jobless claims for the week to April 13 - April 23, Thursday (6:00 p.m. IST)
** April S&P Global manufacturing, services, and composite Flash PMI - April 23, Thursday (7:15 p.m. IST)
** April U-Mich sentiment final - April 24, Friday (7:30 p.m. IST)
