By Dharamraj Dhutia and Nimesh Vora
MUMBAI (Reuters) – The Indian rupee’s direction this week will be determined by the continuation of dollar inflows and the degree to which the central bank permits the currency to strengthen, while bond yields are expected to decline further.
The rupee rallied 1.2% to 85.9725 per U.S. dollar last week, its best weekly performance in two years, on persistent inflows via foreign banks and the unwinding of short wagers on the currency.
Inflows related to inter-company borrowings and repatriation of corporate profits are usual in March, the last month of the financial year.
“Whether the flows will continue this week is what will decide if the rupee is able to sustain at the current level,” a currency trader at a bank said.
“And at some point, you would expect the Reserve Bank of India to step in to rebuild reserves and to reduce the size of its forward book.”
Anil Bhansali, head of treasury at Finrex Treasury Advisors, reckons it was possible that the rupee may extend its run higher to near 85.70-85.75 this week.
He is advising his clients to hedge their near dollar term payables at that level.
Traders will also keep a close eye on the dollar index and U.S. Treasury yields. The dollar index has been on a downtrend amid worries over a U.S. economic slowdown. The S&P flash U.S. services and manufacturing data due Monday will help investors gauge the health of the world’s largest economy.
Meanwhile, the benchmark 10-year bond yield ended at 6.6249% on Friday, down 7 basis points for the week, posting its biggest decline in four months.
Traders expect the yield to trade in the range of 6.60%-6.65% this week.
Bond yields fell last week, as stronger-than-expected demand for state debt, a surprise announcement from the RBI for a third debt purchase auction for this month, dovish Federal Reserve and a jump in the rupee aided sentiment.
The RBI will buy bonds worth 500 billion rupees ($5.82 billion) on Tuesday. The central bank has already infused over 5.50 trillion rupees into the banking system through a combination of primary and secondary market bond purchases, FX swaps and early-April maturity repos.
Sentiment has remained favourable after local retail inflation eased to 3.61% in February – the lowest since July 2024 – from 4.26% in January.
Market participants have raised bets of yet another interest rate cut in April by the RBI. The authority had reduced rates by 25 basis points last month, which was its first cut in nearly five years.
ICICI Securities Primary Dealership said changes in India’s growth inflation mix have led to a change in the view to 75-100 basis points of policy of easing.
