Rupee and bonds brace for volatile week as oil stays high, RBI hike bets grow

The Indian rupee and government bonds are set for a testing, holiday-shortened week, with crude oil prices elevated, global bond yields at multi-year highs and growing expectations of a Reserve Bank of India rate hike at its next policy meeting.

The rupee ended Friday at 95.8150 per dollar, barely changed from a week earlier. Over the weekend, US President Donald Trump said he had turned down an Iranian proposal to reopen the Strait of Hormuz and halt fighting in the Middle East, while Iran maintained that only diplomacy can resolve its conflict with the United States. Traders expect RBI intervention, which kept the currency confined between 95.50 and 96 last week, to persist.

Data released on Friday showed India's foreign exchange reserves fell by nearly $15 billion in the week ended September 15, to $765.9 billion.

Investors will also track key US data this week, including the September non-farm payrolls report and August personal consumption expenditure inflation figures, along with comments from Federal Reserve policymakers. These are expected to shape positioning for further US rate hikes. A softer payroll reading could ease US yields and offer some relief to regional currencies, while continued labour-market strength and sticky price pressures would keep US rates higher for longer and support the dollar.

Bonds

Government bonds may face further selling in the final week of the fiscal first half as hawkish RBI bets build, with traders anticipating continued draining of surplus banking-system liquidity. The benchmark 10-year yield is expected to trade in the 7.05% to 7.15% range, with attention also on US yields and oil prices.

The benchmark yield ended Friday five basis points higher for the week at 7.1194%, its sixth straight weekly rise. Over the six weeks from August 17, it added 36 basis points — the longest rising streak in more than a year. The RBI has already sold bonds worth 750 billion rupees and will auction 250 billion rupees of securities on Monday.

Deutsche Bank expects liquidity withdrawal to continue through foreign-exchange intervention, adding that further debt sales and sell/buy swaps remain possible, and that a 50-basis-point increase in the cash reserve ratio cannot be ruled out. The CRR, the share of deposits banks must hold with the RBI, currently stands at 3%. Banking-system liquidity surplus jumped to a record after a much larger-than-expected $133 billion inflow under the RBI's special forex mobilisation scheme.

Market focus is likely to stay on the absorption of weekly supply, RBI liquidity operations, the October monetary policy outcome, crude oil prices and global bond yields.

Key data this week

• India: August industrial output on Monday; August fiscal deficit data on Wednesday; September HSBC manufacturing PMI on Thursday.
• US: September consumer confidence on Tuesday; August core PCE and final April-June GDP growth on Wednesday; weekly jobless claims, final S&P Global manufacturing PMI and ISM manufacturing PMI on Thursday; September non-farm payrolls and unemployment rate, plus August factory orders, on Friday.