By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, May 25 (Reuters) – The Indian rupee and government bonds are likely to kick off the week on firmer footing as expectations rise that a breakthrough might be imminent in the three-month-old U.S.-Iran war after U.S. President Donald Trump said the Iran deal is “largely negotiated”.
The rupee fell to a record low of 96.96 per dollar last week before being shored up by firm central bank intervention, which helped it close stronger at 95.69 on Friday.
“RBI’s aggressive intervention may keep upside in USD/INR capped for a few sessions if crude remains below $110 per barrel,” FX advisory firm IFA Global said in a note.
Traders expect the currency to hover between 95 and 96 this week, with headlines surrounding the Iran war likely to dictate directional momentum.
Trump said on Saturday an agreement between Washington and Tehran would reopen the Strait of Hormuz, the vital shipping passage whose closure has sparked a global energy crisis and lifted crude oil prices by roughly 45%.
Traders will also keep an eye on the Reserve Bank of India’s $5 billion USD/INR buy-sell swap auction on Tuesday, which analysts reckon is likely intended to roll over the central bank’s previously conducted swaps alongside mitigating the impact of its dollar sales on rupee liquidity in the banking system.
BONDS
India’s 10-year benchmark bond ended at 7.0917% on Friday, up 3 basis points on the week, a fourth climb in five weeks.
Bond yields moved higher as positive momentum from easing oil prices and U.S. Treasury yields was outweighed by fears of a potential early start to the central bank’s rate-hiking cycle, and a lower-than-expected surplus transfer from the RBI.
However, “this does not change the fiscal math at this juncture as fiscal pressures continue to rise due to the subsidy burden,” said Sakshi Gupta, an economist at HDFC Bank.
Traders expect the 10-year yield to move in a 7.02% to 7.15% range this week, with the focus being on oil prices, U.S. Treasury yields, as well as local cues on interest rate expectations.
The RBI monetary policy committee’s next rate decision is due on June 5. Though most economists are not expecting any rate action, Standard Chartered Bank and MUFG are among the first to call for a hike to manage currency, inflation expectations and capital outflows.
Bonds have been under constant selling pressure from a relentless rise in oil prices and U.S. yields, with a depreciating currency further compounding matters.
