By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee and government bonds will be guided this week by the fallout of the Middle East tensions on oil prices, risk assets and safe havens such as U.S. Treasuries and the dollar.
Over the weekend, Iran’s first direct attack on Israel fueled fears of a wider conflict. Israeli Prime Minister Benjamin Netanyahu vowed on Sunday his country would achieve victory after the military said it shot down almost all drones and missiles launched by Iran.
The response in Asia to rising worries around the Middle East situation has been measured so far. Oil prices were marginally lower, the safe haven dollar dipped and U.S. equity futures inched up, while U.S. Treasury yields rose.
“Oil will be the key moving part (for rupee and India government bond yields) and in that, the important question will be whether Israel will retaliate,” a treasury official at a bank said.
“Markets it looks seems to think that Israel will not, based on the reaction so far.”
The rupee closed at 83.4125 against the U.S. dollar on Friday, dipping 0.1% for the week. The 10-year Indian government bond yield ended at 7.1794%, up six basis points through the week.
A higher-than-expected increase in U.S. consumer inflation weighed on the rupee and pushed government bond yields higher last week.
The rupee “no doubt” is “at serious risk of seeing a big fall” and the Reserve Bank of India will “have to participate”, the treasury official said.
The rupee is likely to face downside pressure but expectations of intervention by the RBI a will ensure gradual depreciation, said Anindya Banerjee, head of foreign exchange research at Kotak Securities.
Meanwhile, traders expect India’s 10-year yield to move in the 7.13%-7.25% range this week.
“The move in the 10-year U.S. yield, along with oil prices, will remain the most critical factor for Indian bonds over the near term,” said Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership.
KEY EVENTS:
** India March WPI inflation – April 15, Monday (12:00 p.m. IST) (Reuters poll 0.51% on-year)
** U.S. March retail sales – April 15, Monday (6:00 p.m. IST)
** U.S. March housing starts – April 16, Tuesday (6:00 p.m. IST)
** U.S. March industrial production – April 16, Tuesday (6:45 p.m. IST)
** U.S. initial weekly jobless claims week to April 8 – April 18, Thursday (6:00 p.m. IST)
** U.S. April Philly Fed Business Index – April 18, Thursday (6:00 p.m. IST)
** U.S. March existing home sales – April 18, Thursday (7:30 p.m. IST)
** Minutes of India’s Monetary Policy Committee’s April policy decision – April 19, Friday (5:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D’Souza and Varun H K)
