By Dharamraj Dhutia and Nimesh Vora
MUMBAI (Reuters) – The Indian rupee is likely to fall further this week, weakening past a psychologically important level, in the wake of an ongoing rally in the U.S. dollar on upbeat economic data, while bond yields could rise, tracking U.S. peers.
The rupee, which is on a 10-week losing run, will not get much respite after data indicated that the U.S. labour market is chugging along at a healthy pace.
The rupee is expected to be in the 85.80 to 86.40 range this week. It dipped 0.2% last week to 85.9650, hovering near an all-time low.
The currency is likely to weaken past the 86 level at the open on Monday.
A crucial resistance level for USD/INR was at the 86.00 zone, said Kunal Sodhani, vice president at Shinhan Bank India.
A decisive break past this level could open the gates for a rally towards 86.60, he said.
U.S. employers added 256,000 jobs last month, compared to the 160,000 jobs expected by economists that were polled by Reuters, data released on Friday showed. The unemployment rate unexpectedly dipped to 4.1%.
“Yet another upside surprise on U.S. jobs numbers will intensify the belief that Federal Reserve officials are under no pressure to cut interest rates in the near term.” ING Bank said in a note.
The dollar index on Friday climbed to nearly 110, the highest in over two years. U.S. equities plunged and the 10-year U.S. yield rose.
Meanwhile, India’s benchmark 10-year bond yield ended at 6.7724% on Friday, little changed for the second consecutive week, as traders await key U.S. and domestic economic data.
The U.S. non-farm payroll data on Friday will be followed by inflation figures in India and the United States, due on Monday and Wednesday.
This is the last set of economic data before the central banks of both countries announce their monetary policy decisions.
Traders expect the Indian 10-year bond yield to be in the 6.76%-6.84% range this week, with the focus on U.S. Treasury yields and moves in the Indian rupee.
U.S. yields continue to be elevated as investors remain concerned about the Federal Reserve’s interest rate trajectory after it halved its rate cut forecast to two in 2025.
Back home, liquidity conditions are expected to be in the spotlight, with lenders urging the Reserve Bank of India (RBI) to infuse durable liquidity into the banking system in the wake of a persistent tightness in liquidity conditions.
Standard Chartered Bank expects the RBI to cut banks’ cash reserve ratio for a second time in two months, when the central bank announces its policy decision in February. The foreign bank has pushed back its rate cut call to April and June from February and April.
