Indian rupee seen under pressure on US tariff worries, RBI policy in focus
The rupee closed at 87.54 against the U.S. dollar on Friday, down 1.2% for the week, pressured by persistent foreign portfolio outflows and a 25% levy on Indian exports.
While the local unit is hovering near its weakest level since February, fresh tariff announcements on dozens of U.S. trading partners also pushed other Asian currencies to multi-month lows.
The dollar index, meanwhile, posted its best weekly gain since 2022 as expectations of a U.S. rate cut in September faded.
The odds of a reduction in September rose to 80% after data released on Friday showed that the U.S. economy added fewer jobs than expected, while the unemployment rate rose to 4.2%.
Meanwhile, the maturity of a $5 billion dollar-rupee buy/sell swap conducted by the RBI earlier this year will be in focus on Monday.
"It would be prudent to break the swap into delivery and rollover. The rupee has probably seen its worst for this quarter and some support will bring it to a desirable level, while not disturbing liquidity, said Alok Singh, group head of treasury at CSB Bank.
Traders expect the rupee to trade between 87.00 and 87.80 this week and reckon that the central bank may continue to intervene to limit excessive volatility.
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield , settled at 6.3680% last week, up 2 basis points (bps).
Traders anticipate the yield will remain in the 6.33%-6.38% band till the RBI's policy decision on Wednesday. The range could be tested on either side, depending on policymakers' decision and guidance.
Although some market participants expect a rate cut, a majority of economists polled by Reuters believe RBI will hold rates steady this time.
"While it is a close call, our bias remains for a 25 bps rate cut at the August meeting," Citi said.
A drop in India's retail inflation to a more-than-six-year low in June, coupled with expectations that it may slip to a record low in July, have heightened hopes of a rate cut.
However, RBI Governor Sanjay Malhotra last month said that the bar for further easing is now higher than it would have been if the stance was still "accommodative".
The central bank slashed rates by a steeper-than-expected 50 bps in June and shifted its policy stance to "neutral" from "accommodative".
"As the RBI awaits the impact of the large easing it has already done, we believe it will stay put on repo rate changes on 6 August," HSBC said in a note.
Key Factors:
India
** July HSBC services PMI and composite PMI - August 5, Tuesday (10:30 a.m.)
** Reserve Bank of India's monetary policy decision - August 6, Wednesday (10:00 a.m.)(Reuters poll - no change)
U.S.
** June factory orders - August 4, Monday (7:30 p.m. IST)
** June international trade - August 5, Tuesday (6:00 p.m. IST)
** July S&P Global composite PMI final - August 5, Tuesday (7:15 p.m. IST)
** July S&P Global services PMI final - August 5, Tuesday (7:15 p.m. IST)
** July ISM non-manufacturing PMI - August 5, Tuesday (7:30 p.m. IST)
** Initial weekly jobless claims for week to July 28 - August 7, Thursday (6:00 p.m. IST)
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