Rupee faces choppy path, bond yields likely to decline; inflation data key

Growing certainty of a U.S. Federal Reserve rate cut later this month could likely help ease Indian government bond yields and provide modest relief to the rupee, which has otherwise been pressured by persistent concerns over steep U.S. tariffs.

The rupee slipped to its all-time low of 88.36 last week, bogged by worries of punitive U.S. tariffs hurting growth and further hitting portfolio flows. The currency ended the week at 88.2650, down marginally week-on-week.

India’s FX and debt markets were shut on Monday for a local holiday.

The dollar remained on the backfoot after declining 0.5% against a basket of major peers after data on Friday showed that U.S. job growth weakened sharply in August, prompting investors to add to wagers of an outsized 50-basis-point rate cut from the Fed later this month.

While a broadly weaker dollar takes some pressure off the rupee, traders reckon that sustained dollar demand from importers and portfolio outflows are likely to keep the currency’s outlook skewed towards further weakness.

Dollar-selling interventions by the Reserve Bank of India (RBI) have helped limit the local unit’s losses but analysts at Goldman Sachs reckon that the RBI is unlikely to expend too many reserves to support the rupee. “We flattened the path for our USD/INR forecasts to 87.5, 87.0 and 86.0 (from 84.5, 84.0 and 83.5 previously) on a 3M, 6M and 12M horizon,” the analysts said in a Friday note. U.S. consumer price and wholesale inflation data will be in focus this week to gauge the impact of tariffs on prices in the world’s largest economy.

India’s consumer price inflation data is due on Friday as well.

The country’s 10-year benchmark 6.33% 2035 bond yield settled at 6.4651% on Friday – a drop of 13 basis points, its biggest weekly drop in four months, after rising an aggregate 17 bps in the previous two weeks.

Traders anticipate the yield will remain in the 6.40%-6.48% band this week, as U.S. yields have come off sharply, while local worries over fiscal slippage and additional supply have abated to a large extent.

U.S. Treasury yields slumped after the jobs data, with the interest-rate sensitive 2-year and the benchmark 10-year U.S. yield briefly breaking below key levels of 3.50% and 4.10%, respectively, to record their lowest levels in five months.

“Slowing growth, along with range-bound inflation (and) dovish Fed commentary, can provide elbow room for the RBI to reduce rates by another 25 or 50 bps,” said Anil Bamboli, senior fixed income fund manager at HDFC Asset Management Company.

“Thus, directionally we expect yields to trade within a range with downward bias over the medium term.”

Bond market sentiment improved after Finance Minister Nirmala Sitharaman told local media that the government will meet its fiscal deficit budget target and there will be no changes in the borrowing calendar.

Bond yields had jumped since middle of August on fears of fiscal slippage after the government announced sweeping tax cuts.