By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) – The Indian rupee will track the dollar and Chinese yuan’s reaction to escalating global trade tensions this week, while the domestic central bank’s monetary policy decision will influence the direction of the currency and government bonds. The rupee closed at 85.2350 against the U.S. dollar on Friday, up nearly 0.3% for the week, its third straight weekly gain. A broadly weaker dollar, bogged down by concerns about a growth slowdown in the United States, helped lift the rupee and most of its Asian peers last week.
On Friday though, the dollar reclaimed some lost ground after Federal Reserve Chair Jerome Powell signaled a cautious tone on future rate cuts and U.S. labour market data came in stronger than expected. Tariff-related developments will remain the focus for currency markets though after China retaliated with a matching 34% levy on all U.S. imports on Friday.
As markets digest the flurry of tariff developments, the rupee is likely to hover between 84.70 and 85.70 in the near-term, said Dilip Parmar, a foreign exchange analyst at HDFC Securities.
The Reserve Bank of India will deliver its policy decision on Wednesday and is widely expected to cut rates by 25 basis points amid expectations that monetary policy may turn more supportive as tariffs threaten to hurt economies globally.
U.S. inflation data due on Thursday will also be in focus to gauge how the prices of goods and services are being impacted by trade policies.
Meanwhile, the 10-year benchmark bond yield ended at 6.4630% on Friday, down by 12 basis points for the week and posting the biggest weekly decline in 14 months.
Traders expect the benchmark 10-year bond yield to hover in the 6.42%-6.50% range until the monetary policy decision.
The yield dropped last week as sweeping U.S. tariffs boosted expectations of an aggressive rate cut cycle by the RBI in the coming months, while the announcement of yet another open market purchase plan also aided sentiment.
Some market participants are also expecting the central bank to change its stance and provide some positive guidance on liquidity, which moved into surplus at the end of last month.
“Bond yields slipped further after the RBI surprised by announcing another OMO for April, signaling a strong preference for surplus liquidity to aid transmission. We look for a 25bp cut in the repo rate to 6% and change in stance to accommodative at the April meeting, tapping into the wide real rate cushion,” said Radhika Rao, executive director and senior economist at DBS Bank. KEY EVENTS:
India
** Reserve Bank of India monetary policy decision – April 9, Wednesday (10:00 a.m.)
** February industrial production – April 11, Friday (4:00 pm IST) (Reuters poll: 5.00%) U.S. ** March CPI and core CPI inflation – April 10, Thursday (6:00 p.m. IST) (Reuters poll – 0.2% month-on-month)
** Initial weekly jobless claims for week to March 21 – April 10, Thursday (6:00 p.m. IST)
** March PPI machine manufacturing – April 11, Friday (6:00 p.m. IST)
** April U Mich sentiment prelim – April 11, Friday (7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Sonia Cheema and Eileen Soreng)
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