Indian rupee to gauge portfolio flows, diversion in bond yields to persist
The rupee rose to 85.6250 per dollar on Friday and stocks also gained after the Reserve Bank of India delivered an outsized rate cut to support economic growth.
Traders reckon that the growth-supportive measures from the central bank could be a boost for Indian equities and encourage foreign portfolio inflows, helping the local currency.
A pick-up in inflows would turn the bias on the rupee for a rise above 85, a trader at a state-run bank said.
Meanwhile, jobs data released on Friday in the U.S. surprised slightly to the upside, helping lift the dollar alongside optimism over easing trade tensions following news that U.S. and Chinese officials would meet for trade talks this week.
The dollar index rose nearly 0.5% on Friday but was slightly down week-on-week.
"Against the weaker USD backdrop, we believe INR likely stands to gain," Citi said in a note, adding that the Reserve Bank of India's actions on Friday should help reinvigorate portfolio inflows.
"We continue to believe that USD/INR can come off towards 85 in the next few weeks followed by 83 in the next few months."
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield ended little changed on a weekly basis at 6.2373%. Traders expect the yield to move in the range of 6.18% to 6.28% this week.
The yield on the five-year liquid 6.75% 2029 bond yield plunged six basis points last week to end at 5.8150%.
Shorter-duration bond yields declined as the RBI slashed repo rate by a larger-than-expected 50 bps, and also announced a cut in banks' cash reserve ratio in four tranches from September to November, which will release 2.5 trillion rupees ($29.2 billion) into the banking system.
However, the RBI changed its policy stance to "neutral" from "accommodative", limiting the scope for future rate cuts.
"After having cut the policy rate by 100 bps in quick succession since February 2025, the monetary policy committee also felt that under the present circumstances, monetary policy is now left with very limited space to support growth," RBI Governor Sanjay Malhotra said.
The RBI will keep its key interest rate on hold at 5.50% until at least the end of this fiscal year to support slowing urban household consumption, a snap Reuters poll of economists found.
"Strong demand from domestic participants will be crucial in anchoring yields lower. We expect demand to remain sticky at the longer end, especially from life insurance and pension funds," Barclays said.
KEY EVENTS:
** India May consumer price inflation - June 12, Thursday (4:00 p.m. IST) (Reuters poll: 3.00%)
U.S.
** U.S. consumer price inflation - June 11, Wednesday (6:00 p.m. IST) (Reuters poll: 2.5%)
** Initial weekly jobless claims week to June 2 - June 12, Thursday (6:00 p.m. IST)
** May PPI machine manufacturing - June 12, Thursday (6:00 p.m. IST)
** June U Mich sentiment prelim - June 13, Friday (7:30 p.m. IST)
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