Indian Rupee Relies on Central Bank Support as Bonds Track U.S. Peers

The Indian rupee is set to lean heavily on the Reserve Bank of India (RBI) this week as global economic factors and expectations around U.S. monetary policy apply pressure. A surge in the U.S. dollar and elevated bond yields following Donald Trump’s presidential victory are creating significant headwinds for Asian currencies.

The rupee closed at ₹84.3950 on Thursday, narrowly recovering from a record low of ₹84.4125 earlier in the week. Indian financial markets were closed on Friday due to a holiday.

Rupee Faces Dual Challenges

The rupee has outperformed many regional currencies this month, declining only 0.5% compared to peers that fell as much as 3%. However, it remains under pressure due to portfolio outflows and a strengthening dollar, driven by expectations of slower interest rate cuts by the U.S. Federal Reserve. Fed Chair Jerome Powell’s recent comments about a cautious approach to lowering rates reduced the likelihood of a December rate cut, adding to the rupee’s challenges.

Market participants are watching the RBI’s stance closely, with traders suggesting that defending the ₹84.50 level will be critical in the coming days. Frequent RBI interventions have so far prevented steeper declines in the currency.

Foreign Outflows and Bond Market Trends

November has seen significant outflows from Indian financial markets. Foreign investors have sold over $2.5 billion worth of local stocks and nearly $1 billion linked to JPMorgan index-tracked Indian government bonds. Additionally, bond yields have been impacted by these outflows, with foreign investors net selling ₹74 billion ($876.3 million) worth of bonds in the first two weeks of November.

India’s benchmark 10-year government bond yield rose to 6.83% last week, driven by elevated U.S. Treasury yields and domestic retail inflation surging past the RBI’s tolerance band for the first time in 14 months due to rising vegetable prices.

Rupee Resilience Compared to Peers

While many emerging markets are feeling the heat of rising U.S. yields, analysts believe Indian bonds may be relatively insulated due to lower foreign ownership. Edward Ng, senior portfolio manager at Nikko Asset Management, noted, "Emerging market bonds may face pressure in the current environment, but India’s bond market is less vulnerable due to limited foreign exposure."

Key Events to Watch

The focus this week will be on both domestic and international economic data. India’s July-September GDP figures, set for release at the end of November, will provide crucial insights ahead of the RBI’s monetary policy decision on December 6. Globally, U.S. housing starts, jobless claims, and PMI data will influence market movements.

The rupee’s performance will hinge on the RBI’s interventions and investor sentiment, while bond yields are expected to track movements in U.S. Treasury rates. Traders anticipate yields in the 6.78%-6.85% range this week as they navigate a volatile macroeconomic environment.