By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – Persistent foreign portfolio outflows may keep the Indian rupee on the defensive this week with the currency taking cues from regional peers, while government bonds will react to liquidity infusions by the central bank.
The rupee, rose slightly week-on-week to settle at 86.7125 against the U.S. dollar on Friday.
While the local unit’s near-dated realized volatility eased last week, persistent selling of domestic stocks by overseas investors has kept it under pressure, which traders reckon is likely to persist.
Foreign investors have net sold over $11 billion of local equities over 2025 so far, contributing to the rupee being one of Asia’s worst-performing currencies.
Strong interventions by the Reserve Bank of India have reduced speculative positioning against the currency, but the trend continues to be one of steady depreciation, said Abhilash Koikkara, head of forex and rates at Nuvama Professional Clients Group.
He expects the rupee to be in the 86.40 to 87.10 range in the near-term and weaken towards 88 over six months.
Meanwhile, focus will be on the Reserve Bank of India’s $10 billion 3-year dollar-rupee buy/sell swap on February 28.
The swap follows a shorter-tenor $5 billion buy/sell swap conducted by the central bank last month as part of its measures to infuse liquidity in the banking system.
U.S. personal consumption expenditure inflation data due on Friday will also be in focus to gauge the future path of the Federal Reserve’s policy rates.
Meanwhile, India’s benchmark 10-year bond yield, which ended marginally higher at 6.7065% on Friday, should move in the 6.67% to 6.74% range this week, traders said.
Over the last five weeks, the RBI bought 1 trillion rupees ($11.54 billion) of bonds via open market operations and another 388 billion rupees through secondary market purchases.
It has also infused around 440 billion rupees through a dollar/rupee buy/sell swap and injected 1.83 trillion rupees via long-term repos.
The focus should be towards maintaining durable liquidity, which has seen recent drain due to the rundown of FX reserves, said Dipanwita Mazumdar, an economist with Bank of Baroda.
India’s inflation is seen aligning with the target of 4%, which opens up space for monetary policy to address concerns on the growth front, members of the rate-setting committee said in the minutes of the latest meeting released on Friday.
The RBI cut interest rates by 25 basis points at the February meeting.
Foreign investors have turned sellers of government bonds over the last two weeks.
