India’s rupee and bond markets are poised for volatility this week as oil price fluctuations and geopolitical tensions in the Middle East, coupled with key inflation reports from India and the US, influence investor sentiment and monetary policy outlooks.
Oil prices are set to steer India’s rupee and government bond market this week, as traders weigh fresh tension in the Middle East against incoming inflation data from both India and the United States. The rupee ended Friday at 95.2075 per dollar, about 0.2% stronger over the week, after weak US labour data prompted investors to pare back expectations of further Federal Reserve tightening and pushed Treasury yields and the dollar lower. Reuters also reported that Iran said on Sunday a deal on new shipping lanes in the Strait of Hormuz was close to completion, though the key energy route would only reopen once Washington met other conditions.
Markets are now focused on whether the latest surge in energy volatility filters through to consumer prices. A Reuters poll of 40 economists expects India’s July inflation reading to rise to 4.50% from 4.38% in June, while the United States is also due to release its inflation figures this week. The Reserve Bank of India held rates steady last week, even as ANZ said rising inflation expectations, firmer global commodity prices and resilient domestic demand suggest price pressures could build faster than the central bank currently expects.
Government bonds are likely to trade in a tight band after recovering last week, helped by softer oil prices and a more dovish message from the RBI. The 10-year benchmark yield finished Friday at 6.7651%, down 7 basis points for the week after climbing for four straight weeks before that, and traders expect it to stay between 6.74% and 6.82% in the days ahead. The central bank cut its core inflation forecast by 40 basis points to 4.3% for the current fiscal year and trimmed its headline projection to 5%, while Governor Sanjay Malhotra said liquidity in the banking system would be kept ample.
Crisil has repeatedly warned this year that crude-price shocks can quickly feed into Indian sovereign debt yields by worsening inflation, government finances and the current account. Its recent reports said the benchmark 10-year government security yield rose when oil strengthened, foreign capital flows turned less supportive and US yields firmed, with geopolitical strains in West Asia adding another layer of risk. Vishal Kaushal, head of global markets in India at Crédit Agricole CIB, said the RBI’s willingness to look through temporary supply-side shocks was the key signal for markets, but added that developments in West Asia and their effect on commodities and global yields would largely shape bond moves in the near term.
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