Indian rupee, bonds to gauge Fed rate cut wagers, portfolio flows

Reuters

5 hours ago

MUMBAI, June 30 (Reuters) - The Indian rupee and government bonds are likely to react to shifts in market expectations of interest rate cuts by the U.S. Federal Reserve this week, with traders also keeping an eye on portfolio inflows into local equity and debt markets.
The rupee closed at 85.4750 on Friday, rising 1.3% for the week, its best performance in more than two years, helped by a sharp pullback in crude oil prices and broad weakness in the dollar.
Data released on Friday showed the U.S. consumer spending declined unexpectedly in May, while the Personal Consumption Expenditures (PCE) Price Index gained 0.1%, matching the rise in the previous month.
The dollar index ended the week down by 1.5%. Following the data, traders added to bets on rate cuts by the Federal Reserve this year, most likely starting from September.
In the near term, traders expect the rupee to hover between 85 and 85.80 with a slightly positive bias.
Developments on U.S. trade negotiations will also be in focus this week.
U.S. Treasury Secretary Scott Bessent on Friday said the Trump administration's various trade deals with other countries could be done by September 1 Labor Day holiday, citing 18 main U.S. trading partners.
Meanwhile, a closely watched U.S. labor market report due on Thursday this week, will influence the market on the Fed's rate-cut expectations.
"If the jobs data is weak... and we get numerous trade deals signed that help lift optimism over global growth, we would likely see the dollar selling extended further," MUFG said in a note.
Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield ended at 6.3134% on Friday. Traders expect it to move in a range of 6.28% to 6.35% this week.
Foreign inflows trickled into government bonds over the last few days, but the major focus is on the sustenance of those flows, especially at a time when rate cut bets in the U.S. are rising.
Apart from flows, bond market participants will focus on debt supply and liquidity management from the RBI, some of the key triggers for the week.
Bond market investors are anticipating a tweak in supply pattern, with a reduction in ultra-long 30- to 50-year bonds, and an increase in up to seven-year papers.
The RBI conducted its first reverse repo in seven months on Friday and banks parked 850 billion rupees ($9.95 billion) at the seven-day VRRR.
Traders would wait to see follow-up action from the central bank, and whether the RBI shifts to overnight or shorter-duration reverse repos.
"We see the use of VRRR as a trend shift, with likely use of the liquidity management tool to gradually align weighted average call rate towards the repo rate," said Kanika Pasricha, chief economic adviser, Union Bank of India.
KEY EVENTS:
India
** May fiscal deficit - June 30, Monday (3:30 p.m. IST)
** May industrial output - June 30, Monday (4:00 p.m. IST)(Reuters poll - 2.4%)
** June HSBC manufacturing PMI - July 1, Tuesday (10:30 a.m.)
** June HSBC services PMI - July 3, Thursday (10:30 a.m.) U.S.
** June S&P Global manufacturing PMI final - July 1, Tuesday (7:15 p.m. IST)
** June ISM manufacturing PMI - July 1, Tuesday (7:30 p.m. IST)
** June non-farm payrolls and unemployment rate - July 3, Thursday (6:00 p.m. IST)
** May international trade - July 3, Thursday (6:00 p.m. IST)
** Initial weekly jobless claims for week to June 23 - July 3, Thursday (6:00 p.m. IST)
** June S&P Global composite PMI final - July 3, Thursday (7:15 p.m. IST)
** June S&P Global services PMI final - July 3, Thursday (7:15 p.m. IST)
** May factory orders - July 3, Thursday (7:30 p.m. IST)
** June ISM non-manufacturing PMI - July 3, Thursday (7:30 p.m. IST)
($1 = 85.4400 Indian rupees)