Crude moves to dictate direction for Indian debt, rupee; RBI key for currency
MUMBAI, June 16 (Reuters) - The direction of Indian government bonds and rupee this week will hinge on how the Israel-Iran conflict unfolds and its impact on crude oil prices, while the extent to which the central bank steps in to manage currency volatility will be crucial.
Crude prices had soared on Friday following Israel's attack on Iran. On Monday, Brent crude jumped at open before pulling back. Brent, which climbed past $78 at open on Monday, was last at $74.78.
The Israel-Iran conflict continues to escalate. Israel and Iran launched fresh attacks on Sunday, killing and wounding civilians. Early on Monday, Israel's air force attacked with surface-to-surface missile sites in central Iran.
On Friday, the rupee dropped 0.6%, posting its largest one-day decline in over a month. Bankers said the Reserve Bank of India likely intervened to support the currency.
"The RBI, in a way, indicated that it will not tolerate a big move that is purely driven by the unfolding Middle East conflict," said Kunal Kurani, vice president at risk advisory firm Mecklai Financial.
"I would expect that intraday ranges will now widen and news headline risk will be high."
With India importing the bulk of its crude requirements, any sustained increase in oil prices tends to widen the trade deficit, stoke inflation concerns, and increase demand for dollars from oil marketing companies—all of which are bearish for the rupee.
Apart from oil, focus will be on central bank monetary policy meetings, with the Bank of Japan, Federal Reserve, and Bank of England all due to announce their decisions this week.
Elevated inflation will impact demand for Indian bonds, as it further reduces the likelihood of additional rate cuts, especially after the RBI delivered an outsized 50 bps cut on June 6.
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield ended at 6.2996%. The 10-year yield rose 6 basis points last week, posting its biggest weekly rise since the week ended December 20.
Traders expect the yield to move in a range of 6.27% to 6.35% this week.
Bond yields jumped despite the steepest cut in policy rates in five years, as traders chose to focus on the central bank's guidance that the easing cycle is over.
The impact of the central bank's change in monetary policy stance and the abrupt stoppage of daily fund infusion hurt investor sentiment, leading to selling across the curve.
Since Wednesday, the RBI stopped conducting overnight repos, which it had started in the middle of January.
"We also wait to see if the RBI announces any daily VRRR (variable rate reverse repo) operations to prevent TREPS rate from remaining below the SDF rate, particularly as the monetary policy stance has turned neutral now and RBI discontinuing daily VRR auctions," Kaushik Das, Chief India Economist at Deutsche Bank said.
KEY EVENTS:
** India May wholesale price inflation - June 16, Monday (12:00 p.m. IST)
** Minutes of Reserve Bank of India's June monetary policy meeting - June 20, Friday (5:00 p.m. IST)
** Bank of England rate decision - June 19, Thursday (Reuters poll: No change expected)
U.S.
** May import prices - June 17, Tuesday (6:00 p.m. IST)
** May retail sales - June 17, Tuesday (6:00 p.m. IST)
** May industrial production - June 17, Tuesday (6:45 p.m. IST)
** May housing starts number - June 18, Wednesday (6:00 p.m. IST)
** Initial weekly jobless claims for week ended June 9 - June 18, Wednesday (6:00 p.m. IST)
** Federal Reserve monetary policy decision - June 18, Wednesday (11:30 p.m. IST)(Reuters poll: no change)
** June Philly Fed Business index - June 20, Friday (6:00 p.m. IST)
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
40 minutes ago
- Reuters
Israel-Iran conflict highlights dollar's tarnished safe-haven appeal
ORLANDO, Florida, June 16 (Reuters) - A dramatic spike in the potential for all-out war between Israel and Iran would typically be expected to spark an immediate and strong rally in the U.S. dollar, with investors seeking the safety and liquidity of the world's reserve currency. That didn't happen on Friday. The dollar's response to Israel's strikes on Iranian nuclear facilities and military commanders, followed by Tehran's initial threats and retaliation, was pretty feeble. The dollar index, a measure of the currency's value against a basket of major peers, ended the day up only around 0.25%. To be sure, the dollar fared better than U.S. stocks or Treasuries, which both fell sharply on Friday. But with oil surging over 7% and gold up a solid 1.5%, a strong 'flight to quality' flow would have lifted the dollar more than a quarter of one percent. The U.S. currency's move was particularly weak given the dollar's starting point on Friday. It was at a three-and-a-half year low, having depreciated 10% year to date, with sentiment and positioning heavily bearish. Yet a significant geopolitical shock generated barely a knee-jerk bounce. For comparison, the dollar rose more than 2% in both the first week of the 2006 Israel-Lebanon War and in the week following Israel's invasion of Southern Lebanon last year. The dollar's weak response to this latest Middle East conflict supports the narrative that investors are now reassessing their high exposure to dollars, in light of some of the unorthodox policies put forward by U.S. President Donald Trump in recent months. The dollar was down slightly early on Monday, and gold and oil were giving back some of Friday's gains too, as markets regained a foothold at the start of a busy week packed with key central bank meetings. The dollar has historically been one of the best hedges against short-term volatility sparked by geopolitical risk, behind gold and on a par with oil, according to research published last year by Joe Seydl, senior markets economist at JP Morgan Private Bank. Indeed, a Journal of Monetary Economics paper from last year stated plainly, "The dollar is a safe-haven currency and appreciates when global risk goes up," a trend resulting from the "fundamental asymmetry in a global financial system centered around the dollar" built up over the course of several decades. That latter part of that argument hasn't changed. The dollar accounts for almost 60% of the world's $12 trillion FX reserves, with its nearest rival, the euro, accounting for around 20%. Almost two-thirds of global debt is denominated in dollars, and nearly 90% of all FX transactions around the world has the greenback on one side of the trade. That means traders, financial institutions, businesses, consumers and governments still need to be more exposed to dollars than any other currency, even if they question the direction of current U.S. policy. However, the dollar's downside 'structural' risks are growing, analysts at Westpac noted on Sunday, as concern over Washington's fiscal health and policy uncertainty erode the dollar's 'safe-haven identity'. Investors are now looking to hedge their large dollar exposure more than ever. If this dampens their instinctive demand for dollars in periods of sudden geopolitical tension, uncertainty and volatility, then the so-called 'dollar smile' theory could be challenged. This 'smile' is the idea that the dollar appreciates in periods of financial market stress as well as in 'risk on' periods of strong global growth and investor optimism, but sags in between. This idea was first outlined over 20 years ago by then currency analyst and now hedge fund manager Stephen Jen. If the Israel-Iran conflict continues to escalate, that dollar smile could get rather lopsided. (The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn and X.
Reuters
an hour ago
- Reuters
Rupee ends nearly flat following choppy trading; forward premiums dip
MUMBAI, June 16 (Reuters) - The Indian rupee experienced choppy trading before ending nearly flat on Monday as a broad based decline in the U.S. dollar blunted risk aversion spurred by the escalation in the Iran-Israel conflict. The rupee closed at 86.0650 against the U.S. dollar, nearly unchanged from its close of 86.08 in the previous session. The South Asian currency hovered in a 85.9525-86.23 range on the day with traders pointing to exporter hedging, oil prices and broad-based dollar weakness among the cues that impacted its trajectory. While "traders were biased towards buying dips (on USD/INR), the price action was somewhat confusing, leading to cutting of speculative positions," a trader at a state-run bank said. Meanwhile, the dollar-rupee forward premiums eased. The 1-year implied yield was down 5 basis points at 1.83%, weighed by an uptick in near-tenor U.S. Treasury yields and exporter hedging. The dollar index was down 0.3% at 97.9 and Asian currencies were trading mixed. The offshore Chinese yuan rose 0.1% while the Thai baht declined by about 0.3%. Investors are keeping a close eye on signs that the ongoing Iran-Israel conflict may escalate into a broader regional conflict. "All eyes are now on the trio driving market sentiment— war, trade wars, and central bank moves," said Amit Pabari, managing director at FX advisory firm CR Forex. Pabari expects the rupee to remain volatile in the near-term and reckons that an intensification of hostilities in the Middle East could push the currency towards 86.50-86.80. Meanwhile, India's merchandise trade deficit (INTRD=ECI), opens new tab narrowed to $21.88 billion in May, according to government data released on Monday. India and the U.S. aim to sign an interim trade deal before July 9, an Indian trade ministry official said on Monday.
Reuters
an hour ago
- Reuters
Crypto group Tron to go public in US via reverse-merger with SRM
June 16 (Reuters) - Hong Kong-based crypto entrepreneur Justin Sun's blockchain group Tron will go public in the United States in a reverse merger with SRM Entertainment (SRM.O), opens new tab, the companies said on Monday.
