Rupee, bonds to respond to US inflation data, Fed rate expectations

Rupee in focus: The Rupee and government bonds are poised to react to developments surrounding US inflation figures and evolving perceptions regarding potential Federal Reserve rate adjustments. 

Local inflation indicators will also play a crucial role in shaping bond market sentiments.

Closing slightly lower at 83.0350 against the US dollar on Friday, the Rupee experienced a marginal weekly decline of 0.1 per cent. 

Asian currency weakness contributed to the Rupee's softness, although dollar sales by foreign banks helped limit losses, according to traders.

In the upcoming week, inflation data releases from both India and the US are anticipated. However, the US inflation report is expected to exert a more notable impact on the Rupee, as highlighted by Dilip Parmar, a foreign exchange research analyst at HDFC Securities. 

He noted that the 82.80-90 zone is likely to act as a "demand zone" for dollars, restricting potential Rupee appreciation.

Recent strength in US economic indicators and the Federal Reserve's resistance to early rate cut expectations bolstered the dollar and pushed US bond yields higher, with the 10-year US Treasury yield hovering around 4.15 per cent.

Meanwhile, the Reserve Bank of India (RBI) maintained its policy rates and stance at the recent meeting, refraining from providing dovish guidance. This suggests that interest rate cuts may not be imminent as the central bank focuses on achieving its 4 per cent medium-term inflation target.

Following the RBI's decision, India bond yields climbed, with the 10-year benchmark bond yield closing at 7.1067 per cent on Friday, marking its highest level since January 31. 

The benchmark yield recorded a 5 basis points increase for the week, the most significant movement since early January.

Market participants anticipate the benchmark bond yield to fluctuate within the 7.05 per cent-7.15 per cent range in the upcoming week.

Nomura analysts highlighted the Indian economy's Goldilocks scenario, characterised by robust headline growth, contained core inflation, and potential risks of elevated food inflation. 

They expect the RBI to implement rate cuts totaling 100 basis points between August and March.

The market had anticipated a dovish stance, given easing inflationary pressures and the government's fiscal prudence demonstrated in the budget announcement for the upcoming financial year. 

Meanwhile, the government aims to decrease the fiscal deficit to 5.1 per cent of GDP next fiscal, with a gross borrowing target of Rs 14.13 lakh crore.

Traders will closely monitor the January retail inflation figures, with a Reuters poll projecting a decline to 5.09 per cent from December's 5.69 per cent.

(With Reuters Inputs)