The Indian rupee risks slipping to a record low this week in wake of surging oil prices, while bond investors will eye the central bank’s action on debt sales.
Brent crude soared 5.7% on Friday on investors pricing in the possibility that the conflict in the Middle East could widen after Israel began ground raids inside the Gaza Strip.
The rupee was in a narrow 15-paisa range last week, largely thanks to the Reserve Bank of India’s intervention. The rupee closed at 83.2625 last Friday, nearly unchanged week-on-week and just shy of the 83.29 record low.
The RBI has been selling in non-deliverable forwards and over-the-counter markets, and possibly in futures markets,” said Anil Bhansali, head treasury at Finrex Treasury Advisors.
Following the U.S. inflation data, the focus this week shifts to the U.S. retail sales print due on Tuesday and housing numbers. Plus, there are several Fed speakers lined up to speak this week.
BONDS
Bond yields eased last week, with the benchmark ending marginally lower after rising in the preceding two weeks.
The benchmark 7.18% 2033 bond yield ended at 7.3166%, down two basis points (bps) for the week – after rising 19 bps in the previous two weeks.
Market participants expect it to be in a wide 7.27%-7.40% range this week, with a major focus on the developments in the RBI’s open market operations (OMO).
Bond yields have remained elevated since the central bank announced its intention to conduct bond sales via auctions, with the market expecting sales of 500 billion rupees ($6.01 billion) and auctions conducted within this quarter.
The RBI has also signalled it would keep rates high and liquidity tight to bring inflation closer to its 4% target, limiting downside in yields.
“Bond yields may harden further, and not fall much below 7.30% as oil prices and U.S. yields have started rising again. The timing of the RBI’s first OMO sale would be the next crucial trigger, said VRC Reddy, treasury head at Karur Vysya Bank.
Traders will also continue to keep an eye on U.S. yields and oil prices amid the ongoing conflict in the Middle East.