By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, June 29 (Reuters) – Renewed Middle East hostilities, foreign portfolio flows and U.S. rate-hike bets will drive the Indian rupee and government bonds as traders return from a long weekend.
The rupee closed at 94.3950 per U.S. dollar on Thursday, little changed on the week but on course for its first month-on-month gain since February. Indian markets were closed on Friday for a local holiday.
Over the weekend, Iran struck U.S. military sites in Kuwait and Bahrain after President Donald Trump threatened to target Iranian leaders unless they upheld the interim peace deal.
The focus will yet again turn to oil prices, with any retreat in risk sentiment expected to hurt the South Asian unit, which has steadied after hitting historic lows last month.
“The macro backdrop is also turning more supportive for INR duration as inflation expectations are easing and lower oil prices should reduce fiscal risks,” analysts at Goldman Sachs said in a note.
In addition to developments in the Middle East, global markets will keep a keen eye on expectations surrounding interest rate hikes by the Federal Reserve this year.
Over three-quarters of economists in the June 23-25 Reuters poll see the federal funds rate remaining steady through 2026, defying market pricing for two hikes.
Economic data supporting rate-hike bets could lift global bond yields and pressure risk assets such as the rupee. U.S. payrolls report is due on Thursday and is expected to show 110,000 jobs were added in June.
BONDS
Government bonds rose last week as oil prices slid. However, yields gave up some of their declines and hit a strong floor on Thursday, with the 10-year failing to break below 6.75%.
The 10-year benchmark yield ended at 6.7690% on Thursday, down 8 basis points for the week — its fifth straight weekly decline. It has plunged 28 bps over the last five weeks.
Traders expect the benchmark yield to move within the 6.72%-6.84% range this week, with the focus on oil prices, foreign flows and hints on the inclusion of Indian bonds in Bloomberg’s Global Aggregate Index.
Foreign investors have bought a net 279 billion rupees ($3 billion) of bonds so far this month, mostly after the Reserve Bank of India’s June 5 measures to boost inflows.
Purchases are already at a record since the RBI created a separate category for unrestricted investment.
“The recent measures address some of the roadblocks to inclusion in the Bloomberg index, particularly the tax issue, as India has now aligned itself with other zero-tax sovereign issuers included in this index,” Shiv Chopra, a senior portfolio manager, emerging markets fixed income at BNP Paribas Asset Management.
“Liquidity and market depth have also now been improved as this benchmark requires a deep pool of investable assets.”KEY INDICATORS:
India** May industrial output – June 29, Monday (4:00 p.m. IST)
** June HSBC manufacturing PMI – July 1, Wednesday (10:30 a.m. IST)
** June HSBC services PMI – July 3, Friday (10:30 a.m. IST)U.S.** June consumer confidence – June 30, Tuesday (7:30 p.m. IST)** June S&P Global manufacturing PMI final – July 1, Wednesday (7:15 p.m. IST)
** June ISM manufacturing PMI – July 1, Wednesday (7:30 p.m. IST)
** June non-farm payroll data and unemployment rate – July 2, Thursday (6:00 p.m. IST)** Initial weekly jobless claims for the week to June 27 – July 2, Thursday (6:00 p.m. IST)
** May factory orders – July 2, Thursday (7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Janane Venkatraman and Rashmi Aich)
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