Indian rupee to track dollar recovery, bond market focused on rate cut bets

MUMBAI: The Indian rupee will likely take cues from how far the dollar’s nascent recovery extends this week, while bonds will move based on expectations of interest rate cuts by the local central bank.

The rupee closed at 86.1475 on Friday, down 0.4% on the week. It is expected to hover between 85.80 and 86.70 in the near-term with a slight weakening bias, according to traders.

After falling for five straight months, the dollar index is up 1.5% in July so far, as strong U.S. economic data and indications that tariffs have started pushing up prices lowered rate-cut expectations in the world’s largest economy.

Remarks from Federal Reserve Chair Jerome Powell on Tuesday will be in focus, in light of the persistent criticism he has faced from U.S. President Donald Trump for not lowering interest rates.
The odds of a U.S. rate cut in September are around 53%, per CME’s FedWatch tool.

India’s ongoing trade negotiations with the U.S. will also be in focus alongside quarterly earnings reports from local companies, which have a bearing on foreign portfolio flows into equities.

Forex advisory firm IFA Global recommended that importers cover near-term liabilities around 86, while suggesting exporters hedge around 86.25.

Meanwhile, India’s 10-year benchmark 6.33% 2035 bond yield , which settled last week at 6.3058%, is expected to move in a range of 6.28% to 6.33%.

The yield could rise as New Delhi sells 300 billion rupees ($3.5 billion) of the benchmark on Friday.

Focus will be on the potential for rate cuts after India’s retail inflation slipped to a more than six-year low in June. An expected further drop to a record low in July is prompting calls for another rate cut.

“With recent high frequency data disappointing and indicating the possibility of growth in India slowing down further…it makes sense to be involved in local currency bonds also on the potential for more support from the RBI further down the line,” said Giulia Pellegrini, lead portfolio manager emerging market debt at AllianzGI.

Market participants would also track whether the Reserve Bank of India turns more aggressive in withdrawing liquidity after drawing out 2 trillion rupees from the banking system on Friday.