By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, – The Indian rupee and government bonds face fresh pressure this week as stalled efforts to resolve the U.S.-Iran conflict keep oil prices elevated and strain capital flows into the energy-importing nation.
The rupee fell to a record low of 95.33 on Thursday, pressured by volatile oil prices and hawkish signals from the U.S. Federal Reserve. India’s financial markets were shut on Friday for a local holiday.
Traders said the rupee could face further pressure due to weak fundamentals, though they remain cautious about the central bank’s market interventions to slow the decline.
The United States and Israel suspended their bombing campaign against Iran four weeks ago, but appear no closer to a deal to end the war. Over the weekend, President Donald Trump said he is likely to reject a peace proposal from Iran and mused about the possibility of restarting air strikes.
The conflict has also pressured the currencies of other oil-importing nations such as Japan, Indonesia, the Philippines, and Thailand. Japan intervened to support the yen against the U.S. dollar last week, sources familiar with the matter told Reuters.
“We continue to see the Indian rupee as vulnerable if the Iran and Middle East conflict is sustained, even as our base case assumes some gradual de-escalation,” MUFG said in a note.
In their base case, the firm expects the rupee to hover between 95 and 96, but a prolonged escalation could push it towards 97-98.
Finance leaders from China, Japan, South Korea, and the ASEAN group of 10 Southeast Asian states said they would monitor risks stemming from excessive volatility in financial markets and stand ready to act if needed.
BONDS
India’s 10-year benchmark bond, which rose 7 basis points to 7.0148% last week, is expected to see further gains.
Traders expect the yield on this note to move in a 6.96% to 7.10% range this week after posting its biggest weekly jump in four.
The benchmark Brent crude contract hit a four-year high last week, as the U.S. plans to keep blocking Iranian ports, while Iran continues to threaten to shut down the Strait of Hormuz, which, before the war, carried about a fifth of global oil output.
The benchmark Brent crude contract was around $108 per barrel, 50% higher than the level over the last nine weeks since the war started on February 28.
“The market is currently under the grip of negative sentiment due to the ongoing West Asia conflict, which has resulted in a sharp market correction,” Vikas Garg, head of fixed income, Invesco Mutual Fund.
“In the event of a positive resolution on the war front, we could see a swift rebound toward the 6.80%-6.85% range. Conversely, yields could inch higher in a prolonged war scenario.”
Meanwhile, foreign investors ended the month as bond buyers, after heavy selling in March and the initial part of April. These investors net bought bonds worth 52.6 billion rupees ($554.33 million) in April, after net sales of 177 billion rupees in March, the highest monthly outflow in six years. KEY INDICATORS:India** April HSBC manufacturing PMI – May 4, Monday (10:30 a.m. IST)** April HSBC services PMI – May 6, Wednesday (10:30 a.m. IST)U.S.** March factory orders – May 4, Monday (7:30 p.m. IST)** March international trade, May 5, Tuesday (6:00 p.m. IST)** April S&P Global composite and services PMI final – May 5, Tuesday (7:15 p.m. IST)
** March ISM non-manufacturing PMI – May 5, Tuesday (7:30 p.m. IST)
** March new home sales units – May 5, Tuesday (7:30 p.m. IST)
** Initial weekly jobless claims for the week to May 2 – May 7, Thursday (6:00 p.m. IST)
** April non-farm payroll and unemployment rate – May 8, Friday (6:00 p.m. IST)
** May U-Mich sentiment prelim – May 8, Friday (6:00 p.m. IST)
($1 = 94.8900 Indian rupees)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Nivedita Bhattacharjee and Rashmi Aich)
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