Rupee, bond outlook in Samvat 2083 hinges on West Asia, inflation, flows | Economy & Policy News

The rupee and government bonds are likely to take cues from developments in West Asia, prices of crude oil, inflation, and the flow of foreign capital in Samvat 2083, with uncertainty over the currency’s trajectory and the interest-rate outlook keeping investors cautious.

 

The rupee could appreciate towards 92 per dollar in the near term if there is a credible resolution to the United States-Iran conflict, as a sharp correction in prices of crude oil would ease pressure on the domestic currency.

 

However, the gains are likely to be limited, with the rupee expected to gradually weaken towards 96-97 over the medium term, according to Gaura Sen Gupta, chief economist, IDFC First Bank.

  

Recent measures of the Reserve Bank of India (RBI), including a separate window for oil-marketing companies and steps to make currency hedging more expensive, have eased pressure on the spot market.

 

“The RBI’s measures have improved its ability to manage the rupee and reduced pressure on the spot market. However, the appreciation is likely to be limited because the central bank will use the opportunity to rebuild its foreign-exchange reserves, given its forward-book commitments and upcoming repayments under Foreign Currency Non-Resident (Bank),” said Sen Gupta.

 

In contrast, V R C Reddy, head of treasury, Karur Vysya Bank, expects the rupee to remain relatively stable, supported by stronger capital inflows and softer prices of crude oil.

 

“The new Samvat begins on a more constructive note. The inflation rate is expected to peak by December and soften thereafter, while improving global sentiment and stronger capital inflows could support equities and keep rupee depreciation in check,” Reddy said.

 

The yield on the 10-year government bond is expected to trade in a range of 7-7.5 per cent, with market participants divided over the extent of monetary tightening and the scope for a correction in yields.

 

Madan Sabnavis, chief economist, Bank of Baroda, expects yields to remain elevated, citing persistent inflation and the likelihood of further rate increases. “I do not think central banks will stop increasing rates because inflation is an issue everywhere. This will keep bond yields elevated and a range of 7.3-7.50 per cent can be expected as we look at another 75 basis-point upward climb in the repo rate this cycle. The easing of bond yields we are seeing now is temporary,” Sabnavis said.

 

In contrast, Sen Gupta has lowered her 10-year yield forecast to 7-7.2 per cent from 7.4-7.6 per cent earlier, citing lower prices of crude oil and easing expectations of the interest rate going up. However, elevated food prices, the risk of El Niño affecting rabi crops, and a higher government-bond supply in the second half of the financial year could limit gains in bond prices.

 

Sen Gupta expects growth in gross domestic product to exceed 7.2 per cent this year but cautions that the inflation rate could rise beyond 5.2 per cent, keeping monetary policy hawkish. She sees room for two rate increases of 25 basis points, in December and February, and has not ruled out another increase depending on how the situation evolves in Q1FY28.

 

The outlook comes after a difficult Samvat 2082, during which the rupee depreciated 6.37 per cent against the dollar, weighed down by outflows of foreign portfolio investment, a widening trade deficit, and global uncertainties.

 

Reciprocal tariffs imposed by the United States on Indian goods, uncertainty over trade negotiations, and a stronger dollar hurt investor sentiment. Escalating tensions in West Asia since late February added to the pressure, as rising prices of crude oil stoked concerns over India’s import bill and current account deficit.

 

The bond market also witnessed a sharp rise in yields. The benchmark 10-year government bond yield climbed 69 basis points to 7.19 per cent on November 6, from 6.50 per cent at the beginning of Samvat 2082.

 

Global bond movements, foreign investor outflows, domestic liquidity and concerns over government borrowing weighed on sentiment. While the RBI’s rate cuts and liquidity infusion initially supported the market, inflation concerns and rising prices of crude oil had limited gains.

 

The RBI raised the policy repo rate by 25 basis points to 5.50 per cent in October and shifted its stance to “calibrated tightening”.

 

The 10-year yield subsequently touched 7.48 per cent on October 26 before easing to 7.19 per cent by November 6, as softer prices of crude oil and declining global yields improved sentiment.