05 Oct , 2021 By : Kanchan Joshi
Mumbai: The Indian rupee and government bond prices weakened on Tuesday as crude oil prices extended gains after hitting a seven-year high, posing a risk to India's trade and current account deficit, and inflation outlook.
The domestic currency declined 0.3% to 74.51 a dollar after hitting a low of 74.64, a level last seen on 20 July.
Yield on the 10-year government bond rose 6.27%, the highest since April 2020, up 3 basis points from the previous day's 6.24%. Bond yield and prices move in opposite directions.
Crude oil prices extended gains after rallying to the highest level since 2014 following a decision by the Organization of the Petroleum Exporting Countries (OPEC) to maintain its planned gradual increase of supply, despite the market facing an energy crunch.
“There is a counter-intuitive correlation between crude and rupee, and after yesterday’s OPEC meet the volatility in fx has returned. The next trigger will be the US non-farm payrolls report. Only a materially lower NFP and some cooling off in crude prices will reverse the trend in USDINR spot, said Emkay Global Financial Services in a note.
"Otherwise, an upbeat data will add bets for a November FOMC tapering, cementing the uptrend in dollar. So, this week, we expect USDINR spot to trade in between 74.20-74.75 with a positive bias. Only a break of 74.75 will push prices towards 75 zone. On the downside, a break of 73.80 will negate the bullish view," it added.
Analysts also expect a large outflow of funds from emerging nations, notably India, to invest in safe-haven US Treasuries if yields there climb sharply. Traders are concerned that any sharp increase in Brent crude prices above $85/barrel may result in an increase in oil imports, widening the trade deficit.
Meanwhile, traders await the Reserve Bank of India's bi-monthly policy outcome on Friday.
RBI is likely to signal a gradual unwinding of emergency liquidity measures introduced after the covid-19 outbreak but may keep key interest rates unchanged in its bi-monthly monetary policy review this week. While the central bank is expected to retain its accommodative stance, it may hint at the coming policy normalization.
"India’s macro stability appears to be improving, and the RBI appears set to downgrade inflation, while potentially upgrading growth forecasts. Still, we believe the RBI will take more steps towards normalizing policy and may signal that the December MPC will be a ‘live’ meeting," said Barclays India in a note to investors.
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