Hawkish MPC, West Asia conflict cloud rupee, bond yield outlook

Synopsis

In light of the hawkish monetary policy minutes and the ongoing conflict in West Asia, the outlook for the rupee and bond yields appears uncertain. However, record forex inflows offer a cushion for the central bank, allowing it to manage currency pressures effectively. Analysts expect the rupee to fluctuate between 95.50 and 96.00, with interventions from the central bank.

Mumbai: Hawkish signals from the minutes of the latest monetary policy committee (MPC) review, escalation of the conflict in West Asia and the possibility of higher sugar imports are among the factors keeping the outlook for the rupee and bond yields clouded.

What could be a mitigating factor, however, is the record haul from forex-inflow programs. India has so far received $72.8 billion in dollar inflows through the special swap facility, giving the central bank an additional buffer to manage pressure on the currency.

ET Bureau

Forces In Play: Oil prices and the prospect of higher sugar imports could also weigh, while $72.8 b in swap inflows will offer comfort to the central bank

The rupee, aided by central bank interventions, is expected to trade between 95.50 and 96.00 levels, while the 10-year bond yield is expected to trade with a negative bias, around 6.85% levels.

"The minutes of the Monetary Policy Committee were more hawkish compared to the statements, so the market will take some time to adjust. The floor is 6.87% to 6.88% for the 10-year yield, and it will move upwards if there are more crude shocks. Additionally, global bonds, especially US rates, are also trading with a negative bias whose impact is felt domestically," said Gopal Tripathi, head of treasury, Jana Small Finance Bank.

The August MPC minutes struck a more hawkish tone, with members flagging that a broadening of inflation pressures could warrant a rate hike or policy recalibration.

Read more: FPIs invest Rs 23,544 crore in Indian equities in Aug on earnings revival, rupee stability

Separately, US Treasury yields initially fell sharply after the Treasury announced it would double its buybacks of longer-dated debt. After the buyback announcement on Thursday, the 10-year yield fell about 6 bps to 4.66%, while the 30-year dropped nearly 10 bps to 5.18%. But the rally quickly faded, by Friday, the US 10-year was back near 4.70% and the 30-year near 5.24%

The 10 year India yield has decreased 28 bps to 6.85% this fiscal year.

Oil Pressure

For the rupee, oil prices remain a key pressure point even as the RBI continues to intervene. The intervention is expected to persist given the sizable inflows of $72.85 billion generated through the special swap facility, with $717 billion in foreign exchange reserves, traders said.

"Domestic markets' price action is likely to be more influenced by energy prices and US rate movements, with USDINR's attempts to break above 96.0 attracting strong counter presence of the RBI," said Radhika Rao, senior economist, DBS Bank.

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