By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, June 1 (Reuters) – The Indian rupee and government bonds this week will hinge on the run-up to the central bank’s high-stakes monetary policy decision, as the Iran war intensifies risks to India’s growth and inflation outlook by keeping energy prices stubbornly high
The rupee closed at 95 per dollar on Friday, shored up by the Reserve Bank of India’s (RBI) intervention, which boosted the currency to its best week since late March, with a 0.7% gain.
Over the weekend, U.S. Defense Secretary Pete Hegseth said that Washington is ready to restart attacks on Iran if a deal cannot be reached as negotiators from Washington and Tehran worked to bridge major differences blocking an agreement.
The war has caused an unprecedented global energy crisis, complicating the task of central banks globally as they grapple with potentially slower growth and higher inflation.
Against this backdrop, the RBI is widely expected to hold the repo rate at its monetary policy decision on Friday. Nearly 80% of economists in the May 22-29 Reuters poll expected the Monetary Policy Committee to keep the rate unchanged at 5.25%.
“A hold on rates could create some pressure on the rupee, boost short tenor bonds while keeping the longer tenor bonds under pressure,” a senior trader at a foreign bank said.
The central bank is also expected to update its inflation and growth forecasts for the fiscal year ending March 2027.
“We do not expect the RBI to hike rates to defend the INR, but look for a hawkish pause alongside possible measures to attract dollar inflows to stabilize external financing conditions,” analysts at Goldman Sachs said in a note.
Investors will also pay close attention to India’s January-March economic growth data, which is also due on Friday.
BONDS
The yield on India’s 10-year benchmark bond ended at 7.0037% on Friday, shedding 6 basis points for the week, its biggest decline since the week ended April 10.
Bond yields dropped after oil prices and U.S. Treasury yields eased, even as fears of an early start to the rate-hike cycle dented appetite.
The benchmark Brent crude eased 11% last week, but still remains 30% higher than pre-war levels at around $92 per barrel, while the 10-year yield eased 12 bps to around 4.45%
Traders expect the 10-year yield to move within a 6.94%-7.06% range this week, ahead of the monetary policy decision on Friday, with the focus on oil and developments in the war.
Over the last few weeks, bonds have been under pressure as a spike in oil prices and a drop in the local currency raised the chances of an earlier-than-expected rate hike.
The Strait of Hormuz, which handles about a fifth of global oil and liquefied natural gas flows, has remained largely shut since February 28.
“Looking ahead, risks of demand–supply mismatches remain pronounced, stemming from potential fiscal slippage amid the prolonged Middle East conflict, a possible shift in RBI’s policy stance toward tightening, and increased state debt issuance,” said Shobit Gupta, chief investment officer, Generali Central Life Insurance.KEY INDICATORS:
India
** May HSBC manufacturing PMI – June 1, Monday (10:30 a.m. IST)** April industrial output – June 1, Monday (4:00 p.m. IST)
** May HSBC services PMI – June 3, Wednesday (10:30 a.m. IST)** RBI monetary policy decision – June 5, Friday (10:00 a.m. IST) (Reuters poll: repo rate unchanged)** January-March economic growth data – June 5, Friday (4:00 p.m. IST) (Reuters poll: 7.3%)U.S.** May S&P Global manufacturing PMI final – June 1, Monday (7:15 p.m. IST)** May ISM manufacturing PMI – June 1, Monday (7:30 p.m. IST)
** May S&P Global composite and services PMI final – June 3, Wednesday (7:15 p.m. IST) ** April factory orders – June 3, Wednesday (7:30 p.m. IST)** May ISM non-manufacturing PMI – June 3, Wednesday (7:30 p.m. IST)
** Initial weekly jobless claims for the week to May 30 – June 4, Thursday (6:00 p.m. IST)
** May non-farm payroll and unemployment rate – June 5, Friday (6:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Saumyadeb Chakrabarty and Rashmi Aich)