US and Japan Monetary Policy Reviews: Both the Bank of Japan (BoJ) and US Federal Reserve are scheduled to review their monetary policies this week (Wednesday). The Fed may choose to keep the rates unchanged. However, it may signal confidence in the underlying recovery with explicit communication to prepare financial markets for a potential rate action before the end of 2016. On the other hand, the BoJ's policy decision will come against the background of ongoing negative rates and quantitative easing programme conundrum.
Open Market Operations and Domestic Macro Support Bond Dynamics: Net G-sec borrowing (adjusted for the Reserve Bank of India's G-sec purchases and redemption) stands at around INR1.2trn - enabling favourable demand-supply dynamics. Additionally, the near 100bp monthly fall in retail inflation has stoked the rate cut expectation - supporting bond prices. The agency believes scope for a further rate action is skewed towards December than October as the regulator will await confirmation of inflation softness in the upcoming readings.
Bonds Set to Consolidate: The bond market movement in the near term will be a function of the outcomes of the Fed and BoJ's policies, as risk appetite will remain a major determinant of yields.
Rupee to Face Headwinds: The pressure that has built up in global markets will have a trickle down impact on the rupee. While domestically, the currency has been anchored strongly on the back of healthy investment flows and a narrow current account deficit, sentiment in currency markets is likely to be cautious following jittery global sentiments.
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