Author: Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee is likely to remain under pressure from a broad dollar strength this week, while government bond yields will track U.S. Treasuries this week after the Federal Reserve forecast smaller interest rate cuts next year.
The rupee hit a record low of 85.10 against the dollar on Friday, ending the week down 0.2%, its seventh consecutive weekly decline. [INR/]
Intervention by the Reserve Bank of India (RBI) supported the currency, while other currencies in the region fell 1.2%, leaving emerging market central banks scrambling to stabilize their currencies.
The U.S. dollar index rose 0.8% last week, rising for a third consecutive week. It hit a two-year high on Wednesday, but retreated after data on Friday showed that the U.S. core personal consumption expenditures price index increased 0.1% quarterly in November, lower than economists’ expectations for a 0.2% increase.
With relatively little U.S. economic data heading into the year-end, traders expect the rupee to be largely influenced by foreign portfolio flows as well as movements in the U.S. dollar.
According to traders, the rupee is likely to hover between 84.90 and 85.40 this week. Abhishek Goenka, chief executive of Forex Consulting, said that while a runaway move was unlikely, “the Reserve Bank of India will use its (foreign exchange) reserves wisely, so if we see continued strength in the dollar , we are likely to see a steady depreciation of the rupee,” IFA Global.
According to central bank data, India’s foreign exchange reserves fell to a nearly six-month low of $652.9 billion in the week ended December 13.
Due to frequent intervention by the Reserve Bank of India to support the local currency, foreign exchange reserves have dropped by US$52 billion from the record high of US$704.89 billion set at the end of September.
Meanwhile, the benchmark 10-year Treasury yield ended last week at 6.7891%, up 6 basis points as bearish sentiment intensified after the Federal Reserve made a hawkish forecast for interest rates in 2025.
Traders expect yields to remain in the 6.75%-6.80% range this week, focusing on Treasury yields. The U.S. 10-year Treasury yield hit its highest level in nearly seven months last week following the Federal Reserve’s forecast.
Alok Singh, head of treasury at CSB Bank, said: “In the short term, Indian bond yields have basically tracked U.S. yields, and since liquidity conditions are tight, I think Indian interest rates will face some upward pressure until liquidity eases.”
At the same time, according to the minutes of the December meeting, members of the Indian interest rate setting group stated that high prices are the cause of slowing demand, and aligning the inflation rate with the central bank’s 4% target is the key to ensuring continued economic growth.
