Which way rupee, yield headed? Kim summit, Fed may drop clues


By Gaurang Somaiyaa

The rupee turned highly volatile last week after consolidating in a narrow range, triggered by RBI’s announcement to raise rates by 25 bps to 6.25 per cent.

In a surprise move, the central bank decided to raise rates and its inflation projection for the second half of 2018-19 to 4.7% from the 4.4% seen earlier. It became the latest in Asia to raise rates to battle inflationary pressures or support the domestic currency.

The RBI governor focussed on inflationary pressure the economy is facing, which prompted the committee to tighten rates.

This week, market participants will be keeping an eye on inflation and industrial production numbers to gauge a view on the rupee. Broadly, volatility could continue to remain high for the currency, which is expected to quote in a wide range of 67.20 and 68.20.

About crosses, the euro continued to inch higher against the dollar as political uncertainty eased in Italy and on comments from ECB chief economist that the bank may start winding down its massive stimulus programme. Positive momentum in the euro could continue ahead of the important ECB policy statement. The central bank governor is expected to be keep his tone ‘hawkish’ and that may prop up the euro lower levels.

Japanese yen after strengthening for two successive weeks fell against the dollar as political uncertainty eased in Italy. Safe haven buying has been one of the major reasons that led to strength in the yen.

India’s 10-year yield rose to the 8% mark after the RBI tweaked its rule relating to valuation of government securities. The RBI said investors in state government bonds will now have to value this debt at market prices, and not at a fixed mark-up that was allowed for years.

The central bank’s move has come as a surprise to bond traders who now are cautious on the already slack demand for government securities that could weaken further and at the same time drive up government and corporate bond yields even more.

India’s 10-year benchmark bond yield briefly breached 8 per cent on Friday — for the first time since December 2014. This came a day after the US yield hit 3 per cent.

In a step to soften the blow, the central bank allowed to spread overall bond trading losses for the current June quarter over the next four quarters. In the recent past, the bond market has gone through a lot of pain and doesn’t look like the pain is yet over.

This week, currency as well as yields will be impacted by global events starting with US-North Korea summit scheduled for Tuesday and Federal Reserve and ECB policy statement that will be out later this week.

(Gaurang Somaiyaa is Currency Analyst at Motilal Oswal Securities)

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