Trade deal developments to drive Indian rupee; bond yields to track Treasuries

Reuters

8 hours ago

MUMBAI, July 7 (Reuters) - Indian rupee traders will monitor trade talks with the U.S. this week, ahead of a July 9 deadline for making deals with the world's largest economy, while government bond yields will likely be range-bound with focus on movement in Treasury yields.
The rupee closed at 85.3925 on Friday, with little change over the week.
Traders reckon that a U.S.-India trade agreement would be a boost for the South Asian country, but it is unlikely to spark a sharp rally.
"If the treaty happens, the rupee may see some more upside while the RBI (Reserve Bank of India) may not be very comfortable with a fast appreciation of the rupee," said Anil Bhansali, head of treasury at Finrex Treasury Advisor. He pegged the near-term resistance for the local currency at around 85.
The rupee's very near-term implied volatility has remained muted despite the uncertainty, reflecting market expectations of a range-bound movement.
The U.S. is close to clinching several trade deals ahead of the July 9 deadline, Treasury Secretary Scott Bessent said on Sunday.
Meanwhile, data released on Friday showed that India's foreign exchange reserves rose to $702.8 billion, as of June 27, in touching distance of an all-time high hit last year.
The dollar continues to trend downwards, with scaled-back wagers on rate cuts by the Fed prompting only fleeting gains last week.
U.S. consumer inflation data due on Tuesday, followed by retail sales data on Thursday, will also be in focus to gauge the future path of benchmark policy rates.
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield ended at 6.2947% on Friday, barely changed for the week. Traders expect it to move in a range of 6.28% to 6.33% this week.
Bond market participants would remain focused on the movement in U.S. Treasury yields this week, especially after strong jobs data reduced hopes for Fed rate cuts.
"Tariffs and other geopolitical uncertainties may contribute to market volatility in the short term, but taking into consideration the modest growth expectations, with the current trend of inflation, there may be scope for monetary easing," said Parijat Agrawal, head of fixed income at Union Asset Management.
Traders will also watch whether the recent surge in foreign inflows into Indian bonds continues, with investors having net bought over $1 billion of government bonds last week.
Also on the radar is the RBI's next move, after it did not raise the quantum of liquidity withdrawal from the banking system despite surplus hitting a three-year high on Friday.
The central bank's gradual approach for variable rate reverse repos (VRRRs) is likely to keep the overnight interbank lending rates between the policy repo rate and the floor of the corridor, allowing some policy transmission, traders said.
KEY EVENTS:
** U.S. initial weekly jobless claims for week to June 30 - July 10, Thursday (6:00 p.m. IST)