Rupee, bonds to balance on high wire of RBI rate decisions, US polls

The next Samvat for the Indian bond market is projected to be a period of relative calm, marked by limited fluctuations in yields and a cautious policy stance from the RBI

Foreign exchange (forex) and government bond dealers expect the timeline for domestic interest rate cuts and the US presidential election to play crucial roles in Samvat 2081.

 

The next Samvat for the Indian bond market is projected to be a period of relative calm, marked by limited fluctuations in yields and a cautious policy stance from the Reserve Bank of India (RBI).

 

With no rate cuts projected until April 2025 and a focus on inflation control, the RBI’s approach aligns well with current domestic and global economic conditions, bond market participants said.

 

Conversely, supported by robust domestic growth, steady capital inflows, and favourable external conditions, the rupee is well-positioned to offset short-term global pressures, dealers observed. 

 

Although predicting long-term currency movements is challenging due to evolving geopolitical factors, the outlook remains cautiously optimistic, with resilience likely characterising the rupee’s journey over the coming months.

 

Market participants indicated that the Indian bond market seems poised to enter a “long-term sleep cycle”. This suggests a period of stabilisation or reduced volatility, likely with limited movement in benchmark yields.

 

A major highlight in the context of monetary policy this year is expected to be the RBI’s decision on interest rates, which suggests a hold on rate cuts throughout the financial year, with potential reassessment only by April of the next financial year.

 

Earlier, expectations were high that the domestic rate-setting panel might cut rates by December of the current year. However, market participants have revisited their expectations based on the RBI’s firm commitment to achieve and maintain inflation at around 4 per cent on a “durable basis”. This objective requires not just one, but several months of consistent data indicating controlled inflation. The central bank governor’s stance reinforces that interest rate cuts will only be considered once inflation stability is well established.

 

“Right now, I think we are entering a longer-term sleep cycle. The broad benchmark yield range for the year should be 6.65-6.9 per cent,” said Vikas Goel, managing director and chief executive officer of PNB Gilts. “I do not see a rate cut happening in the current financial year,” he added.

 

Forex market participants said that the Indian rupee’s trajectory is poised to reflect a mix of domestic resilience and external pressures. With current global volatility and domestic economic shifts, the rupee’s performance will likely be influenced by a range of factors, including capital flows, economic growth, and global geopolitical events.

 

The forecast for the rupee remains stable, with an expected range between 83.5 and 86 against the US dollar, at least until March 2025. Although the rupee recently weakened to 84.08, driven by uncertainty surrounding the US elections and sizeable capital outflows, this depreciation may be temporary.

 

Recent trends indicate $10 billion in outflows from Indian equities in October, but these are expected to taper off as market stability returns and positive earnings are expected in the quarters ahead.

 

“Overall, the broader range for us is the rupee between 83.5 and 84 per dollar. Although we have depreciated to new lows due to uncertainty regarding the US election and capital outflows from India in terms of equity markets, I think this should subside. Even if you look at the RBI’s projections, they have downgraded their second-quarter numbers, but overall, they have maintained a 7.2 per cent gross domestic product growth projection for 2024-25,” said Hitesh Jain, strategist, institutional equities research at Yes Securities India.

 

“They see a recovery in the second half, given the improvement in rural demand and likely increases in government capital expenditure. All these factors should translate into better earnings for the third and fourth quarters, leading to stable capital flows into Indian equities,” he added.