Rupee Falling Down, Traders Eyeing RBI Policy
India Rupee dip: The Indian rupee fell to its lowest level last week, and is likely to trade with a bearish bias this week as well. Traders will be watching how the Reserve Bank of India (RBI) defends the local currency, while bond yields will track the movement of U.S. peers and the rupee.
Rupee’s Record Low and Dollar Pressure
The rupee touched its all-time low of 84.8075 and then closed at 84.5325, which shows a decline of 0.3% in the entire week. The currency has been sliding for the past eight weeks, driven by global and domestic factors such as a strong dollar, India’s slowing growth, and a widening trade deficit.
The dollar index ended the week with a 0.4% gain, marking its fourth consecutive bullish week. Experts believe the rupee’s bearish trend could continue until 2025.
RBI’s strategy and the rupee’s future
According to a private bank trader, “A weak global setup for emerging market currencies could keep the rupee falling until the RBI comes up with a strong policy to defend it.” Rupee is expected to remain in the range of 85.40-85.90 this week. According to Anil Bhansali, treasury head of Finrex Treasury Advisors, “Volatility has returned to Rupee and going forward, we can see big movements in USD/INR pair.”
Rupee’s 1-month implied volatility has touched a 15-month high of 3.5%.
Impact on Bond Yields and Liquidity Concerns
Benchmark 10-year bond yield closed last week at 6.7852%, which is marginally higher. Traders expect bond yields to range between 6.76%-6.84%, with the focus on Treasury yields and currency movement.
On the other hand, the U.S. 10-year yield touched an almost 8-month high, raising concerns about the pace of Federal Reserve rate cuts.
There are also concerns about the fall in liquidity of the banking system in India, which could go into further deficit in the next quarter. According to ICICI Securities head of research A. Prasanna, “The rupee should be allowed to move according to fundamentals and a liquidity crisis should not be created by wasting reserves.”
Asar of Foreign Flows and Economic Data
Traders will also keep an eye on foreign flows this year. Bond purchases by overseas investors had increased in the beginning of December, but this pace has slowed down in recent sessions
Important Economic Events
1. India November Fiscal Deficit: Dec. 31, Tuesday (3:30 PM IST)
2. India November Infrastructure Output: Dec. 31, Tuesday (5:30 PM IST)
3. HSBC India December Manufacturing PMI: Jan. 2, Thursday (10:30 AM IST)
4. U.S. Weekly Jobless Claims: Jan. 2, Thursday (7:00 PM IST)
5. U.S. December ISM Manufacturing PMI: Jan. 3, Friday (8:30 PM IST)
These economic events and global trends will be very impactful for the rupee and bond markets.
