MUMBAI: The Indian rupee and government bonds face another tough week as the Iran war disrupts global energy supplies and weakens investor demand for emerging markets.
The rupee hit a record low of 92.4750 last week, avoiding further losses mainly due to central bank intervention. Oil prices rose above $100 per barrel as military action disrupted a major energy supply route.
The U.S. has rebuffed efforts by Middle Eastern allies to start diplomatic negotiations aimed at ending the Iran war and threatened more strikes on Iran’s main oil export hub, Kharg Island.
The dollar continued to benefit from safe-haven flows, rising 1.6% last week as investors mulled the risks of a global energy disruption on a scale not seen in decades.
“India faces a material terms-of-trade shock from higher energy (prices), with meaningful spillovers via trade, energy supply chains, and remittances,” analysts at Goldman Sachs said in a note. The firm expects the rupee to weaken to 95 over the next 12 months, down from its earlier forecast of 94.
Indian rupee pinned to lifetime low on stubbornly high oil, heavy equity outflows
Traders, meanwhile, expect the Reserve Bank of India to remain active in India’s FX markets to curb excessive volatility, but reckon that the central bank won’t defend specific levels if oil prices remain elevated.
Sustained foreign portfolio outflows could also compound the pressure on the rupee. Overseas investors have already net sold over $5.5 billion of local stocks so far in March.
Bonds
India’s benchmark 10-year yield ended at 6.6798% on Friday, backed by heavy purchases by an investor group that includes the RBI, even as a war-triggered spike in oil prices continued to erode investor confidence.
Traders anticipate the yield will move in a 6.62%-6.72% range this week, amid strong confidence about continued central bank purchases, with oil prices and war-related developments providing further triggers.
The RBI net bought bonds worth 572.10 billion rupees in the week ending March 6, knocking the biggest-ever weekly buying, as the central bank tried to stabilize the market roiled by the Middle East war.
Traders said the central bank was active in the week ended March 13.
Even as the 10-year bond yield remained anchored, overnight index swap rates have been surging on heavy paying interest.
Analysts, however, said OIS rates may be overstating the likely impact of the Iran war on domestic monetary policy.
“There does not seem to be a case for any reversal of policy stance. If current external dynamics worsen and fears of imported inflation increase, the RBI may need to reassess the extent of liquidity support being provided,” said Rajeev Radhakrishnan, CIO-fixed income, SBI Mutual Fund.
“The bond market has been anchored by RBI buying, whereas markets continue to hedge risks through swaps.”
Key events:
India
February WPI inflation – March 16, Monday (12:00 p.m. IST)(Reuters poll 2.00%) U.S. February industrial production – March 16, Monday (6:45 p.m. IST)
February PPI manufacturing – March 18, Wednesday (6:00 p.m. IST) January Factory orders – March 18, Wednesday (7:30 p.m. IST)
Federal Reserve monetary policy decision – March 18, Wednesday (11:30 p.m. IST)
Initial weekly jobless claims for the week to March 14 – March 19, Thursday (6:00 p.m. IST) March Philly Fed Business index – March 19, Thursday(6:00 p.m. IST)
January new home sales – units – March 19, Thursday (7:30 p.m. IST)
American Dollar Exchange Rate