Rupee likely to trade in a range, bond yields may rise further, say analysts

The Indian rupee traded marginally higher against the US dollar on Friday, outperforming its Asian peers, and headed towards a better beginning to 2024. The rupee traded around 83.15 to the US dollar and is up 0.06% this week. The USDINR pair has been trading in a range as foreign capital inflows, Reserve Bank of India (RBI) intervention and strong domestic economic data supported the local currency from any major depreciation.

The US dollar index was steady, heading for its strongest weekly performance since July on scaled back expectations of steep and early interest rate cuts by the US Federal Reserve this year. Investors are looking for the US non farm payrolls data due Friday to gauge how many times the US Fed is likely to cut rates this year.

“The rupee has appreciated this week despite gains in the US dollar index overseas. The foreign capital inflows and RBI intervention have been supporting the local currency for quite long and hence, USDINR has been trading in a range." said Ajay Kedia, Director, Kedia Commodities. Kedia believes the outlook for rupee remains positive in the near term amid strong domestic macroeconomic cues.

“Rupee will get support at 82.80 and may face resistance at 83.44. The USDINR is likely to trade in this range going forward," Kedia said. Meanwhile, the upward projection in Indian government bond yields continued in the first week of 2024, mainly tracking the rise in the US 10 year Treasury yields after strong economic data reduced the likelihood of aggressive rate cuts by the US Federal Reserve.

India’s 10 year benchmark bond yield was around 7.23%. “The upbeat US economic data has been reducing the probability of the Fed starting the rate cut cycle from March 2024, but more clarity will come after tonight’s US non farm payrolls data. Any figure above 1,00,000 may indicate a resilient jobs market.

A sharp rise above the market expectations would take the US 10 year even higher, putting further upward pressure on Indian bond yields," said an economist with a private bank. For next week, she expects India’s 10 year benchmark bond yield to trade in between 7.15% 7.30%. India's retail inflation data is due next week which is expected to stay higher around 5.5%.

This may keep the bond yields on a stronger note. Meanwhile, India will sell 34,000 crore ($4.09 billion) of bonds later on Friday. Traders are concerned about heavy debt sales in this quarter, as states aim to raise 4.13 lakh crore, while the union government plans to raise 2.37 lakh crore through bonds, Reuters reported.

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