Rupee seen testing record lows; bonds to extend fall on Iran war jitters

The Indian rupee could plumb to record lows again this week, while bonds are expected to extend their fall, as investors fret over growth-inflation risks facing Asia’s third-largest economy on account of the Iran war. The rupee slipped past the 96-per-dollar mark to hit a record low last week, falling 5% since the Iran war erupted on February 28. Brent crude oil prices climbed to nearly $110 per barrel, sending global bond yields higher on rising expectations that central banks would need to ‌tighten monetary policy to ⁠rein ⁠in inflationary pressures. Policymakers in India have also taken measures to ease pressure on the rupee including by imposing curbs on imports of precious metals. The central bank has intervened in markets alongside limiting the size of banks’ net open positions.

Over the weekend, most silver imports were restricted – days after the government had lifted import tariffs on both silver and gold. “In the near term, growing balance of payments pressures will have to be absorbed across multiple instruments: rupee depreciation, FX intervention, incentivising capital flows and compressing the current account,” economists at J.P. Morgan said in a note.

Traders expect the rupee ⁠to trade ‌with a depreciation bias this week with central bank interventions expected to be key for limiting sharp swings.

“In case the central bank steps back from the market, it (USD/INR) could very quickly rise past ⁠97-97.50,” a trader at a state-run bank said.
BONDS FALTER India’s 10-year benchmark bond ended at 7.0644% on Friday, up 8 basis points over the week, a third climb in four weeks.

Traders expect the note to move in a 7.00% to 7.14% range this week, with the focus being on oil prices, the rupee and U.S. Treasury yields.

Bonds have been under pressure from a relentless rise in oil prices and U.S. yields, while a depreciating rupee also weighed.

Higher oil prices and a depreciating currency have resulted in deterioration of current account, balance of payments and fiscal deficit, said Gurvinder Singh Wasan, senior fund manager at Baroda BNP ‌Paribas Mutual Fund.

The Strait of Hormuz, which typically handles about a fifth of global oil and liquefied natural gas flows, has effectively remained shut.

Elevated oil prices are detrimental for India, which imports nearly 90% of its crude requirements, as they impact ⁠inflation, widen the current account deficit and complicate the government’s budget calculations.

“Given escalating geopolitical risks, we expect the 10-year bond yield to touch 7.25% in fiscal first half in anticipation of 50 basis points rate hike in second half,” said Arun Srinivasan, chief of fixed income at ICICI Prudential Life Insurance.

KEY FACTORS:

India

** May HSBC manufacturing, services, and composite Flash PMI – May 21, Thursday (10:30 a.m. IST) U.S.

** April housing starts – May 21, Thursday (6:00 p.m. IST)

** Initial weekly jobless claims for the week to May 16 – May 21, Thursday (6:00 p.m. IST) ** May Philly Fed Index – May 21, Thursday (6:00 p.m. IST) ** May S&P Global manufacturing, services, and composite Flash PMI – May 21, Thursday (7:15 p.m. IST)

** May U-Mich sentiment final – May 22, Friday (7:30 p.m. IST)