Author: Dharamraj Dhutia and Nimesh Vora
MUMBAI, Jan 27 (Reuters) – The Indian rupee is under heavy pressure as the Federal Reserve is scheduled to issue its first policy decision of the year this week, while local government bonds are supported ahead of the country’s annual budget.
The rupee fell about 1.2% last week, its biggest drop in six months, after hitting a record low of 91.9650.
Equity outflows accelerated last week, while importers’ hedging was higher relative to exporters as expectations of further depreciation became entrenched. USD/USD’s breakout above $91 sparked more speculative interest, amplifying dollar demand.
“With these pressures unlikely to subside in the near term, the rupee’s downward bias should continue this week,” said Kunal Kurani, vice president at Mecklai Financial.
Apart from fund flows, the rupee will also have to contend with two key events this week, starting with the Federal Reserve’s policy decision on Wednesday.
While no change in interest rates is expected, traders will parse the Fed statement and Chairman Jerome Powell’s press conference for signals on the timing, if any, of future rate cuts.
India’s annual budget is due to be released on Sunday, although traders expect the currency’s preemptive positioning to be limited.
Meanwhile, India and the European Union ended talks on a long-coveted trade deal, a move that benefited the rupee this week, with both sides hailing the deal as historic amid strained relations with the United States.
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The benchmark 10-year 2035 yield, at 6.48%, closed Friday at 6.6635%, down slightly after rising in the previous three weeks as supply outstripped demand.
Traders expect yields to move in a range of 6.61%–6.70% this week.
Bonds are likely to get off to a positive start after the Reserve Bank of India announced another liquidity injection program as it will buy Rs 1 trillion worth of bonds and carry out $10 billion in swaps in February.
The market will be looking for hints from the government on how to deal with the deteriorating supply and demand situation.
The focus will be on the gross borrowing announcement and whether New Delhi plans to increase net issuance of treasury bills.
A Reuters survey showed total borrowing will hit a record 16.27 trillion rupees in the next fiscal year, and Nomura expects the figure to reach 17.5 trillion rupees.
“On the fiscal front, we see consolidation continuing, albeit at a slower pace, and expect the fiscal deficit to be fixed at 4.25%-4.30% in FY27,” said Vikas Garg, head of fixed income at Invesco Mutual Funds.
“The market will closely monitor the financing pattern of the fiscal deficit and we expect the proportion of small savings schemes and government bond issuance to increase in FY27.”
