The Indian rupee is set to maintain momentum this week as a rebound in equity inflows supports sentiment, while government bond yields are expected to be heavily dependent on US yield movements and remain range-bound.
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The rupee broke out of its tight trading range last week to close nearly 1% higher at 81.9650 per dollar as foreign investors returned to Indian equities. It was the best week for the local currency since the week ended January 13th.
A move between 81.60 and 82.50 is expected for the current bank holiday-shortened week, said traders watching for the Reserve Bank of India (RBI) to enter near the bottom of the range.
Indian financial markets will remain closed on Tuesday for a public holiday.
Indian stocks rallied on Friday after Adani Group shares attracted foreign investment, sparking more inflows into equities, which traders said supported the rupee and was a bullish signal.
“The breakout of the rupee led to a big move. This action is likely to continue for a few more days,” said Dilip Parmar, research analyst at HDFC Securities.
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However, fears of tighter US Federal Reserve policy will remain as markets remain sensitive to data releases from the United States, particularly a slew of job reports due this week.
The Indian benchmark bond yield ended Friday lower at 7.4161% on value buying, but remained flat through the week after rising 15 basis points (bps) cumulatively in the previous three weeks.
While longer duration bond yields may fall further, movement in shorter duration bond yields is expected to remain limited by bets on tighter liquidity conditions in March.
Market participants expect the benchmark bond yield to range between 7.36% and 7.44% this week.
They also expect the yield curve to invert later this month as the government increases the supply of Treasury bills at a time when liquidity in the banking system is expected to slide into deficit.
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“There may be a temporary yield curve inversion in some parts, but in India we will not see a long-lasting inversion like in the US as there are no recession expectations,” said Anand Nevatia, fund manager with Trust Investment Fund.
“The inversion would be mainly driven by liquidity concerns and the fact that the RBI has been more hawkish than expected and the shorter end is more anchored to overnight rates.”
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