By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee and government bonds will take cues from the Federal Reserve’s policy decision this week, with investors keeping an eye out for hawkish revisions to future U.S. interest rate projections.
The rupee closed at 84.7875 against the U.S. dollar on Friday, down 0.1% on the week. It hit a record low of 84.88 earlier last week.
Elevated dollar bids in the non-deliverable forwards market, along with expectations of a dovish tilt in monetary policy following the appointment of a new Reserve Bank of India governor, weighed on the rupee last week.
Interventions by the RBI helped limit the rupee’s losses, with traders expecting the central bank to remain active and curb excess volatility. Traders expect the currency to hover between 84.70 and 84.95 this week.
The Fed will deliver its policy decision on Wednesday and investors will closely watch its dot plot to assess if the median interest rate projections show a hawkish shift in the U.S. central bank’s outlook.
The Bank of Japan’s policy decision on Thursday will also be in focus, with the central bank expected to keep rates unchanged.
The rupee may see a pick-up in volatility this week and trade “between 84.60 and the psychologically important 85 level,” said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
Meanwhile, the benchmark 10-year bond yield ended last week at 6.7282%. Traders expect the yield to remain in the 6.70%-6.80% range this week, with a major focus on the Fed decision.
Last week, the yield was largely unchanged amid a plethora of events that included India and the U.S. inflation data and the appointment of the new RBI governor.
Bond yields had declined as speculation rose that the RBI may cut rates in February after the change of guard.
“The change in leadership at the RBI may lead to an initial market assumption that a rate cut in the February policy meeting is more likely,” said VRC Reddy, treasury head at Karur Vysya Bank.
“However, it is essential to note that the final monetary policy decision will ultimately depend on the prevailing inflationary trends and currency movements.”
Markets will also be looking forward to the minutes of the central bank’s December meeting, due on Friday, for cues on the interest rate trajectory.
Earlier this month, the RBI kept its key interest rate unchanged but cut banks’ cash reserve ratio by 50 basis points.
Traders will also monitor foreign investors’ appetite, as they have become significant buyers of Indian bonds over the last few days. KEY EVENTS: ** India December HSBC Flash manufacturing, services and composite PMI – Dec. 16, Monday (10:30 a.m. IST) ** U.S. December S&P Global Flash manufacturing, services and composite PMI – Dec. 16, Monday (8:15 p.m. IST) ** U.S. November retail sales – Dec. 17, Tuesday (7:00 p.m. IST)
** U.S. November industrial production – Dec. 17, Tuesday (7:45 p.m. IST) ** U.S. November housing starts – Dec. 18, Wednesday (7:00 p.m. IST) ** U.S. Federal Reserve monetary policy decision – Dec. 19, Thursday (12:30 a.m. IST)(Reuters poll: 25 bps cut) ** Bank of Japan rate decision – Dec. 19, Thursday (Reuters poll: No change expected) ** Bank of England rate decision – Dec. 19, Thursday (Reuters poll: No change expected)
** U.S. July-September final GDP – Dec. 19, Thursday (7:00 p.m. IST) (Reuters poll 2.9%) ** U.S. initial weekly jobless claims week to Dec. 9 – Dec. 19, Thursday (7:00 p.m. IST)
** U.S. December Philly Fed Business Index – Dec. 19, Thursday (7:00 p.m. IST)
** U.S. November existing home sales – Dec. 19, Thursday (8:30 p.m. IST) ** Minutes of Reserve Bank of India’s December meeting – Dec. 20, Friday (5:00 p.m. IST)
** U.S. November personal consumption expenditure, core PCE index – Dec. 20, Friday (7:00 p.m. IST)
** U.S. December U Mich sentiment – Dec. 20, Friday (8:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Eileen Soreng)
