Indian rupee, bond yields await Fed Reserve's policy move for cues

This week, the Indian rupee and government bond yields are expected to take cues from the Federal Reserve's guidance at a pivotal monetary policy meeting amid the turmoil in the U.S. and European banking sectors.

On Sunday, UBS Group AG sealed a deal to buy Credit Suisse for $3.23 billion, a historic move which was followed by global central banks assuring markets of adequate dollar liquidity via standing swap lines.

The move could bring early relief to the market when they open on Monday. The rupee non-deliverable forwards market signalled a slightly weaker rupee on open.

The rupee finished 0.62% lower at 82.5525 per U.S. dollar last week, as risk sentiment was buffeted by fears about a looming global banking crisis and uncertainty about the Fed's next move.

 

Money markets largely point to a 25 basis point (bps) hike from the U.S. central bank on Wednesday, but there have been calls for a pause.

The rupee should hold an 82.00-82.75 range this week until the Fed meeting, said a state-run bank trader.

Then, they added, the Fed's dot plot, commentary as well as the evolution of the banking turmoil would determine the currency's direction.

We remain glued to the situation as a turn for the worse "can see a break of 83 and set up a test of 84 quickly for the rupee," said Jayaram Krishnamurthy, founding partner and COO at Almus Risk Consulting.

Meanwhile, after two weeks of relative calm, India's benchmark bond yield fell 8 bps last week to end at 7.3511% on Friday, tracking the plunge in U.S. yields amid the banking turmoil.

However, the domestic fixed income and foreign exchange markets are unlikely to see any major fallout, said Ashhish Vaidya, managing director and head of treasury and markets at DBS Bank India.

That view was shared by Nigel Foo, head of Asian fixed income at First Sentier Investors, but he pointed out that Indian debt market valuations were expensive compared with U.S. peers.

"Moreover, the rupee has performed poorly among other Asian high-yielders, which makes buying Indian government bonds even less attractive," Foo added.

Market participants expect the benchmark bond yield to move in the 7.32%-7.42% band this week.

Apart from the Fed, the Indian government's borrowing plan for April-September, likely due towards the end of the month, could also act as a major trigger, traders said.

India's foreign exchange and debt markets will be shut on Wednesday for a local holiday.