The Indian rupee is expected to take cues from its Asian peers, while government bonds will track moves in Treasury yields after U.S. economic data reinforced investors’ expectations that the Federal Reserve will cut interest rates to twice this year.
The rupee closed slightly higher at 83.4225 on Friday. It posted a slight weekly loss against most Asian currencies, which rose week-on-week.
U.S. nonfarm payrolls figures showed employers added 175,000 jobs last month, below economists’ expectations for an increase of 243,000 jobs. The U.S. unemployment rate rose to 3.9%, from 3.8% in March, while wage gains declined.
The dollar fell to its lowest level in almost a month, while US bond yields fell after the data was released as investors increased their bets that the Fed would cut rates twice this year, with 48 basis points of easing planned, up from 42 basis points before the data was released.
“Next week may see some appreciation in the rupee towards 83.15-20 levels with an eye on Asian currency movements,” said Abhilash Koikkara, head of currencies and rates at Nuvama Professional Clients Group.
Meanwhile, the 10-year Indian government bond yield ended at 7.1470% on Friday, down one basis point for the week, its second consecutive decline.
Traders expect the benchmark bond’s yield to move in a range of 7.108%-7.20% this week, focusing primarily on movements in U.S. Treasury yields and investor activity foreigners.
In the absence of major domestic fundamentals, the market will keep an eye on the activity of foreign players, which could provide a strong directional trigger.
Foreign investors had their biggest monthly sale of Indian government bonds in April, the highest in four years, but some investors view that as an aberration and expect inflows to resume in the coming months.
According to the data, these investors sold almost $2 billion worth of government bonds on a net basis in the first five weeks of the current financial year, starting in April.
“We believe that the positive sentiment towards the Indian bond market can persist and that we could see a resumption of inflows into the markets once the global rate environment stabilizes,” said Edward Ng, senior portfolio manager, Asian fixed income, at Nikko Asset Management.
Oil prices also boosted sentiment, cooling from recent highs as concerns over escalating tensions in the Middle East eased.
The government’s surprise announcement to buy back 400 billion rupees worth of securities this week will further stimulate purchases, according to investors.
KEY EVENTS: **HSBC India – April services PMI data – May 6, Monday (10:30 am IST)
** Indian industrial production data for March – May 10, Friday (5:30 p.m. IST) ** Preliminary US U Mich sentiment data – May 10, Friday (7:30 p.m. IST)
