Indian rupee, bonds to take cues from size of Fed rate cut, policy guidance
By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, Sept 16 (Reuters) -The Indian rupee and, to a smaller extent, government bonds will take cues from the Federal Reserve's mid-week monetary policy decision, with the focus squarely on whether it will be a 25-basis-point interest rate cut or a 50-bps cut.
The rupee INR=IN strengthened to close at 83.8875 against the U.S. dollar on Friday. It gained nearly 0.1% on-week, its best weekly performance since the week ended June 25.
Traders expect the rupee to hover between 83.80 and 84.00 this week. The forex and bond markets will be closed for a local holiday on Wednesday, the same day the Fed is to announce its policy decision.
Interest rate futures currently show an even split between the chances of a 25- and a 50-bps cut. The central bank's guidance on future policy will also be important. FEDWATCH
A 25-bps cut is priced in but a 50-bps cut could help the rupee gain 10-15 paisa, said Sajal Gupta, executive director and head of forex and commodities at Nuvama Institutional.
He added that the Reserve Bank of India (RBI) is expected to curb a sharper rise. The RBI's routine two-sided interventions have kept the rupee in a tight range over the last month.
However, the bigger impact of a U.S. rate cut, analysts said, is likely to be on dollar-rupee far-forward premiums, reflecting the widening U.S.-India interest rate differentials since the RBI is not expected to lower rates until December.
BONDS
Meanwhile, India's 10-year benchmark government bond yield IN071034G=CC ended at 6.7904% on Friday, its lowest closing level since March 30, 2022.
The yield fell 6 basis points last week after barely budging in the three weeks before that. It has been stuck in a narrow range since Aug. 5, with the 6.85% level holding fort, as traders did not react to triggers.
They expect the yield to trade in a 6.75%-6.85% band this week, irrespective of the Fed decision.
"We have completed 75% of the bull run and there are wide expectations of a shallow rate-cutting cycle of 50 bps in India," said VRC Reddy, treasury head at Karur Vysya Bank.
"The benchmark yield has moved from 7.20% to 6.80% and the best possible outcome could be 6.60%-6.65% in coming months."
However, traders don't expect the yield to drop below 6.75% in the near future as the policy rate is at 6.50% and is likely to remain so until December.
KEY EVENTS:
** India July WPI inflation - Sept. 17, Tuesday (12:00 p.m. IST)(Reuters poll: 1.85%)
** U.S. August retail sales - Sept. 17, Tuesday (6:00 p.m. IST)
** U.S. August industrial production - Sept. 17, Tuesday (6:45 p.m. IST)
** U.S. August housing starts - Sept. 18, Wednesday (6:00 p.m. IST)
** U.S. Federal Reserve policy decision - Sept. 18, Wednesday (11:30 p.m. IST)(Reuters poll: 25 bps cut)
** Bank of England rate decision - Sept. 19, Thursday (5:30 p.m. IST)(Reuters poll: No change expected)
** U.S. initial weekly jobless claims week to Sept. 9 - Sept. 19, Thursday (6:00 p.m. IST)
** U.S. September Philly Fed Business Index - Sept. 19, Thursday (6:00 p.m. IST)
** U.S. August existing home sales - Sept. 19, Thursday (7:30 p.m. IST)
** Bank of Japan rate decision - Sept. 20, Friday (Reuters poll: No change expected)
Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D'Souza
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