Indian Rupee to Track Portfolio Flows, Bond Yields to Follow U.S. Treasuries

The Indian rupee is expected to be influenced by portfolio flows this week, with a global equity index rejig set to take effect. This comes amid ongoing foreign portfolio outflows from Indian stocks and bonds. Indian government bond yields, meanwhile, will be closely aligned with movements in U.S. Treasury yields.

The rupee (INR=IN) ended Friday stronger at 84.4450 against the U.S. dollar, recovering slightly from a record low of 84.5025 earlier in the session.

The rebalancing of MSCI's equity indexes, set to be effective after market close on Monday, is anticipated to draw approximately $2.5 billion in passive inflows into Indian stocks, according to estimates from Nuvama Alternative & Quantitative Research. These inflows could provide some support for the rupee, which is facing pressure from a stronger dollar and persistent foreign selling in both Indian equities and debt.
Despite the inflows, analysts suggest the rupee’s short-term gains may be limited. “The trend for the dollar-rupee pair is biased toward a gradual rise, but we may see a slight pullback this week,” said Dilip Parmar, a foreign exchange research analyst at HDFC Securities. Parmar expects the rupee's potential to appreciate to be capped near 84.20.

The dollar index rose to a two-year high on Friday, marking its third consecutive weekly gain, while most Asian currencies, including the rupee, registered losses over the week.
Market participants will be watching U.S. personal consumption expenditure (PCE) data, due on Wednesday, to gauge the future path of Federal Reserve policy and its impact on the dollar.
In the Indian bond market, government bond yields rose on Friday, with the benchmark yield closing 2 basis points higher at 6.8470 per cent. This increase came after the Reserve Bank of India (RBI) reiterated concerns over inflation. U.S. Treasury yields also remained elevated.

Traders expect India’s benchmark bond yield to remain within a 6.82 per cent to 6.90 per cent range this week, with movements mirroring U.S. Treasury yields. Along with U.S. core PCE data, Indian traders will also focus on domestic growth data for the July-September quarter, scheduled for release on Friday. A Reuters poll of economists projects India’s economic growth for the period at 6.5 per cent.

This will be the last major data release ahead of the RBI's monetary policy meeting on December 6. Analysts are watching closely, particularly given that foreign investors and banks have been actively selling Indian government bonds over the past few weeks. In November, overseas investors have net sold approximately $1.25 billion in Indian bonds, and foreign banks have sold about $2 billion worth of debt.

Foreign investors may not rush back into Indian bonds anytime soon, as the rupee is expected to remain under pressure, and interest rate cuts appear to be delayed. “The RBI is unlikely to ease too soon, given the progress made on its inflation-targeting framework,” said Nitin Agarwal, head of trading at ANZ India. Agarwal suggested that early 2025 would be a more appropriate time for the RBI to consider rate cuts, as inflation is expected to moderate by then and any slowdown in growth could become more pronounced.

With Reuters Input