By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) -The rupee may find modest relief this week on the back of inflows expected on account of two large initial public offerings, while bond yields may ease due to a lower-than-expected state debt issuance calendar for this quarter.
The rupee closed at 88.77 against the U.S. dollar on Friday, marginally down week-on-week after hitting a record low of 88.80 on Tuesday. The dollar ended the week lower by nearly 0.5% against a basket of peers.
Traders expect IPO-related foreign portfolio flows to help support the rupee this week. Non-bank lender Tata Capital’s $1.75 billion share sale kicks off on October 6 while LG Electronics India will open its $1.3 billion IPO on October 7.
Cumulatively, the October-December quarter is expected to see $8 billion worth of fundraises.
While inflows may help the rupee slightly, a trend reversal is likely to be sparked only by positive developments in U.S.-India trade negotiations, a trader at a state-run bank said. HSBC economists estimate that if the U.S. maintains its 50% tariffs on Indian exporters for a year, the country’s current account deficit could likely double while remaining in the “sustainable zone.”
“With net Foreign Direct Investment inflows having fallen already, and portfolio inflows unpredictable at best, the balance of payments may not look as strong. Thankfully, India has ample FX reserves to tide it over,” they said in a note.
Meanwhile, India’s 10-year benchmark 6.33% 2035 bond yield settled at 6.5114% on Friday, little changed week-on-week.
Market participants are eyeing a dip in yields this week, as states will borrow a lower-than-expected amount in this quarter. Traders anticipate the benchmark yield to remain in the 6.47% to 6.52% band.
Indian states will borrow 2.82 trillion rupees ($31.76 billion) via sale of bonds in the October-December quarter, lower than most market estimates.
After the central government reduced the proportion of ultra-long bonds in this quarter’s debt auction calendar, traders feared that states would borrow a large quantum of funds.
Underlying sentiment has improved after the RBI kept its policy rate unchanged, with Governor Sanjay Malhotra saying there was scope for the 10-year yield to go down.
A majority of market participants now expect a rate cut in December, after a pause in August and October. The RBI has cut rates by 100 basis points since the start of the year.
The scope for additional easing, after a baseline 25 bps cut in the next meeting, will be contingent on downside risks to growth remaining prominent thereafter, said ICICI Securities Primary Dealership.
KEY EVENTS:
India
** September HSBC composite final PMI – October 6, Monday (10:30 a.m.)
** September HSBC services PMI – October 6, Monday (10:30 a.m.)
U.S.
** August international trade – October 7, Tuesday (6:00 p.m. IST)
** Initial weekly jobless claims for week to September 29 – October 9, Thursday (6:00 p.m. IST) ** October U Mich sentiment – October 10, Friday (7:30 p.m. IST)
** September non-farm payrolls and unemployment rate – September 6 – September 10, (6:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Janane Venkatraman and Sherry Jacob-Phillips)
