Indian bonds, rupee to gain after Powell greenlights rate cuts
By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI, Aug 26 (Reuters) -The Indian rupee and government bond prices are expected to gain this week, after U.S. Federal Reserve Chair Jerome Powell endorsed an imminent start to interest rate cuts.
The rupee INR=IN closed at 83.89 per dollar on Friday, up slightly week-on-week.
Most Asian currencies also gained, aided by broad-based weakness in the greenback, as market participants positioned for the start of interest rate cuts in the United States.
"The time has come for policy to adjust," Powell said in a highly anticipated speech on Friday. "We do not seek or welcome further cooling in labor market conditions."
The dollar index fell 0.7% on Friday to its lowest level since December, while the S&P 500 and NASDAQ 100 rose by more than 1%, each.
Investors have fully priced in a rate cut in September, with a total of little over 100 basis points (bps) of rate cuts expected in 2024. FEDWATCH
The rupee is likely to appreciate this week, aided by a weaker dollar but will likely find resistance at 83.70, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
Inflows related to the rebalancing of MSCI equity indexes are also expected to support the rupee this week.
The rebalancing, effective on Friday, is expected to draw inflows of $2.7 to $3 billion, according to Nuvama Alternative & Quantitative Research's estimates.
Investors will pay attention to U.S. GDP and Personal Consumption Expenditures (PCE) inflation data due this week for cues on the future path of policy rates.
The 10-year U.S. yield eased to 3.80% after the speech, as traders are not yet fully convinced about a 50-bps move next month.
A 50-bps cut would look less likely if the unemployment rate drops back this month, which is possible given the role that temporary factors played in driving it higher in July, Capital Economics said.
India's 10-year government bond yield IN071034G=CC, which fell one basis point last week to 6.8591%, should move in a 6.82% to 6.88% range this week.
Bond market participants have been hunting for strong directional triggers and have shrugged off minutes of the latest Fed and Reserve Bank of India meetings.
The RBI last week reiterated its commitment to meet 4%inflation target on a durable basis before moving towards rate cuts, but has allowed banking system liquidity to remain in a comfortable surplus throughout August, aiding softer yields.
ICICI Securities Primary Dealership continues to pencil in a rate cut in India in February, and another in April-June, with scope for deeper easing emerging if a U.S. 'hard landing' scenario gains traction or domestic data undershoots materially.
KEY EVENTS:
** U.S. July durable goods - Aug. 26, Monday (6:00 p.m. IST)
** U.S. August consumer confidence - Aug. 27, Tuesday (7:30 p.m. IST)
** U.S. April-June GDP second estimate - Aug. 29, Thursday (6:00 p.m. IST) (Reuters poll 2.8%)
** U.S. initial weekly jobless claims week to Aug. 19 - Aug 29, Thursday (6:00 p.m. IST)
** India July fiscal deficit data - Aug. 30, Friday (3:30 p.m. IST)
** India July infrastructure output data - Aug. 30, Friday (5:30 p.m. IST)
** India April-June growth data - Aug. 30, Friday (5:30 p.m. IST)(Reuters poll - 7%)
** U.S. July personal consumption expenditure, core PCE index - Aug. 30, Friday (6:00 p.m. IST)
** U.S. August U Mich sentiment final - Aug. 30, Friday (7:30 p.m. IST)
Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Mrigank Dhaniwala and Rashmi Aich
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