Rupee, government bonds to track RBI decision

The Indian rupee and government bonds will take cues from the Reserve Bank of India’s policy decision this week, while the currency is also likely to rely on the central bank intervention for support as it grapples with persistent headwinds.

The rupee closed at 88.7175 on Friday, touching a record low of 88.7975 per dollar earlier in the week.

It was down 0.7% week-on-week, bogged down by concerns over a hit to trade and portfolio flows into India on the back of steep U.S. tariffs and tighter immigration policy.

“It is almost as if the currency has been caught in a torrential monsoon downpour as USD/INR made fresh all-time highs,” analysts at Goldman Sachs said in a note.

“It is important to acknowledge that a lot of bad news is now in the price … and risks may be turning more balanced with growing undervaluation.”

The rupee’s 40-currency real effective exchange rate (REER), a measure of its competitiveness, stood at 98.79 at the end of August, the lowest since April 2023. REER below 100 points to undervaluation. While the central bank is expected to keep policy rates unchanged on Wednesday, a surprise rate cut could add to the pressure on the rupee, a trader at a foreign bank said. Meanwhile, data released on Friday continued to show U.S. economic resilience, taking some steam out of expectations for quick rate cuts by the U.S. Federal Reserve, with focus now on the key U.S. non-farm payrolls data due on Friday.

The dollar ended up 0.5% against a basket of peers last week.

Meanwhile, India’s 10-year benchmark 6.33% 2035 bond yield settled at 6.5231% on Friday, up 3 basis points week-on-week.

Market participants are eyeing an upmove in yields at the start of the week after the government increased the share of 10-year bonds in the borrowing schedule for October-March.

The government will raise 6.77 trillion rupees, of which 1.92 trillion rupees will be borrowed through 10-year bonds.

Traders anticipate the yield to remain in the 6.50% to 6.58% band till the RBI’s monetary policy decision on Wednesday.

A Reuters poll of economists suggests the central bank will keep its key interest rate unchanged.

A rate cut or dovish guidance could lead to a drop in yields to at least 6.40%, while status quo and neutral commentary could test 6.60% levels.

Still, some large market participants have now shifted to the rate-easing camp. Citi, State Bank of India, Capital Economics and Barclays expect a rate cut, joining Nomura and MUFG that have held the view since the August policy decision.

ICICI Securities Primary Dealership sees a 35%-40% chance of RBI cutting rates this week.

“Bond market sentiment has already stabilised, but more volatility should be generally expected around end of rate cut cycles,” said economists Prasanna A and Abhishek Upadhyay, “Monetary policy can best support growth and curb exceptional volatility in market by keeping a steady hand at the wheel.”

KEY EVENTS:

India

** August fiscal deficit – September 29, Monday (3:30 p.m. IST)

** August industrial output – September 29, Monday (4:00 p.m. IST) ** Reserve Bank of India monetary policy decision – October 1, Wednesday (10:00 a.m.)(Reuters poll: no change) ** September HSBC manufacturing PMI – October 1, Wednesday (10:30 a.m.) U.S. ** September consumer confidence – September 30, Tuesday (7:30 p.m. IST)

** September S&P Global manufacturing PMI final – October 1, Wednesday (7:15 p.m. IST)

** September ISM manufacturing PMI – October 1, Wednesday (7:30 p.m. IST) ** Initial weekly jobless claims for week to September 22 – October 2, Thursday (6:00 p.m. IST)

** August factory orders – October 2, Thursday (7:30 p.m. IST) ** September non-farm payrolls and unemployment rate – October 3, Friday (6:00 p.m. IST)

** September S&P Global composite PMI final – October 3, Friday (7:15 p.m. IST)

** September S&P Global services PMI final – October 3, Friday (7:15 p.m. IST)

** September ISM non-manufacturing PMI – October 3, Friday (7:30 p.m. IST)