Rupee and bond yields poised for mild decline as fed meeting approaches

Rupee under pressure: The Rupee is expected to stay under pressure after hitting a record low last week. Both the Rupee and government bonds will be closely watching the Federal Reserve's policy decision on Wednesday.

Foreign investors withdraw

On Friday, the Rupee closed at an all-time low of 83.7275, affected by weak risk appetite and continued dollar demand from oil companies. 

Last week, sentiment was dampened by the government's decision to increase taxes on equity investment profits, leading overseas investors to withdraw around $1 billion from Indian stock markets.

Dilip Parmar, a foreign exchange research analyst at HDFC Securities, indicated that the Dollar-Rupee pair is likely to trend higher, with support shifting upward to 83.45 and resistance at 83.85. Traders expect the Reserve Bank of India to continue intervening to limit market volatility.

US data boosts sentiment

US data released on Friday showed that prices rose as expected in June, fuelling hopes for a rate cut by the Federal Reserve in September. The Dollar ended the week slightly lower, while most Asian currencies gained.

The Fed is anticipated to keep rates unchanged at its July 30-31 meeting, with investors keenly listening to Chair Jerome Powell's remarks to understand the future direction of US policy rates.

The 10-year government bond yield ended at 6.9419 per cent on Friday, down 3 basis points from the previous week. Traders expect the yield to move within the 6.90 per cent to 6.98 per cent range this week, influenced by the Fed's policy meeting.

Bond yields eased last week due to favourable demand-supply dynamics and investor sentiment, although the federal budget announcement had little impact on the longer end of the bond yield curve. 

Deficit target cut

The government reduced the fiscal deficit target by 20 basis points to 4.9 per cent for this year from 5.1 per cent in the interim budget and cut gross borrowing by only Rs 12,000 crore to Rs 14.01 lakh crore. However, it reduced the issuance of Treasury bills, resulting in a net inflow of Rs 50,000 crore.

Market participants anticipate more activity in the shorter end of the yield curve, potentially steepening the curve in the coming days. Vikas Goel, managing director at PNB Gilts, stated that the 10-year part of the bond yield curve is unlikely to show major moves and should remain in the 6.92 per cent-7.00 per cent range, with more action expected in the shorter end.

(With Reuters Inputs)