By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, July 13 (Reuters) – The Indian rupee and government bonds will likely track developments in the Middle East conflict alongside inflation data from the U.S. and India to gauge the impact of volatile oil prices on broader costs and central bank policy decisions.
The rupee closed at 95.3250 per dollar on Friday, down 0.1% on the week, as renewed hostilities in the Gulf dented sentiment.
Traders reckon that the currency remains vulnerable to further weakening if the conflict persists and oil prices rise. In the near-term, three traders pegged the rupee in the 95-96 range.
Over the weekend, U.S. and Iranian forces exchanged heavy missile and drone assaults. Tehran said the Strait of Hormuz will remain closed until the “end of U.S. interference,” raising the risk of higher oil prices.
The focus this week will also be on consumer inflation readings from both India and the U.S., due on Monday and Tuesday, respectively.
Economists polled by Reuters expect India’s CPI to breach the central bank’s medium-term target of 4% in June for the first time in 16 months, while year-on-year core U.S. CPI is forecast at 2.9%.
“Unless US inflation slows materially enough to shift Fed expectations, any Asia FX rally may still prove short-lived. Conversely, another upside inflation surprise would likely reinforce the market’s bullish USD bias and keep pressure on most regional currencies,” MUFG said in a note.
Traders will also keep an eye on foreign portfolio flows linked to a large domestic IPO as a factor for the rupee’s momentum this week.
BONDS
Government bonds swung sharply last week as continued purchases by foreign investors were challenged by heavy selling, tracking a fresh jump in oil prices and Treasury yields, following the end of a ceasefire between the U.S. and Iran.
The 10-year benchmark yield ended at 6.7139% on Friday, recovering from the week’s high of 6.7734%.
The yield was little changed for the week, after dropping for six straight weeks, declining by a cumulative 34 bps over that period.
Traders expect the benchmark yield to move within the 6.65%-6.77% range this week, with the major focus on whether Indian debt will be included in the Bloomberg Global Aggregate Index.
In its January review, Bloomberg said that it would make its next announcement in mid-2026.
Foreign investors have net bought over $4.1 billion of bonds in the last six weeks, starting June 1, under the Fully Accessible Route, and these notes are a part of three emerging market debt indexes.
