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    Stirred but not shaken: Rupee trains its eyes on Opec meet

    Synopsis

    India’s 10-year yield last week consolidated in a narrow range after rallying to levels of 8%.

    RupeeThinkStock Photos

    Before the announcement, the minimum requirement was to invest in government bonds with a minimum residual maturity of three years.

    By Gaurang Somaiya

    The rupee consolidated in a narrow range for the first half of the week, but volatility increased post Federal Reserve and ECB policy announcement.

    The Federal Reserve, in line with expectations, increased the benchmark rate by 25 bps to 1.75-2 per cent, along with projection to raise rates two more times in 2018. Policymakers’ fresh economic projections indicated a slightly faster pace of rate increases in coming months. Their expectation is the economy could grow at 2.8 per cent this year, slightly higher than previously forecast, and dip to 2.4 per cent next year.

    On the domestic front, inflation and IIP number did not impact the currency much. Inflation in May rose 4.87 per cent compared with a rise of 4.53 per cent in the previous month on back of higher crude prices.

    Industrial production was a tad weaker than expected at 4.9 per cent, against expectations of 5.2 per cent.

    Recently, the RBI had raised rates by 25 bps to 6.25 per cent, and at the same time marginally revised upwards its inflation projection for fiscal 2019 on strong crude oil prices in the global market. It had revised CPI inflation for 2018-19 to 4.8-4.9 per cent in first half of the fiscal and 4.7 per cent in the latter half.

    This week, we expect the rupee will be more influenced by the movement in the dollar index and global crude oil prices.

    Market participants will be keeping an eye on the Opec meeting that is scheduled for the weekend. There is an assessment that a fall in global crude inventories, plummeting Venezuelan production and imminent sanctions against Iran could push the agency towards ending their supply cuts.

    There are rumours doing the rounds that Opec and its allies could consider a production increase of as much as 1.5 million barrels a day. It’s unclear whether other members of the group will endorse such proposals, or indeed whether that much oil would actually be added to the market in the event of a deal.

    Recently, the dollar rallied against its major crosses and its continued strength could weigh on the rupee. For the week, the dollar-rupee pair could quote in the range of 67.80 and 68.80.

    The euro witnessed one of the biggest intraday falls after the ECB in its policy statement held rates unchanged and decided to trim its bond buying programme to €15 billion from the existing €30 billion in October-December.

    At the same time, the central bank governor announced that rate could remain steady “at least through the summer of 2019”. Adding to the dovish tone, Draghi emphasised that uncertainty and risks are increasing.

    In its report, the ECB downgraded its growth outlook to 2.1 per cent from 2.4 per cent forecast earlier and upgraded its inflation outlook to 1.7 per cent from 1.4 per cent.

    Political instability in Italy is currently on the sidelines, but Italian bonds rose after the new government of anti-establishment parties promised higher spending. This week, from the euro zone, no major economic data are expected to be released, but volatility will continue to remain high following strength in the dollar against its major crosses.

    India’s 10-year yield last week consolidated in a narrow range after rallying to levels of 8 per cent , post the RBI meeting. The central bank recently tweaked its rule relating to valuation of government securities and the move has come as a surprise to bond traders.

    In the recent past, yields have also risen on reduced participation in Indian bond market. Rising yields would make bond market fund raising unattractive, especially at a time when government is pushing for infrastructure investment.

    This week, some respite could be seen in yields as the RBI relaxed norms for investment by FPIs in debt segment. In its latest circular, the RBI said FPIs are permitted to invest in central government securities (G-secs), including Treasury Bills, and State Development Loans (SDLs) without any minimum residual maturity requirement, subject to the condition that short-term investments by an FPI category shall not exceed 20 per cent of the total investment of that FPI in that category.

    Before the announcement, the minimum requirement was to invest in government bonds with a minimum residual maturity of three years. But in the medium term, we could continue to see bond prices remaining under pressure, but yes a small respite would definitely be seen.

    (Gaurang Somaiya is Currency Analyst at Motilal Oswal Securities)



    ( Originally published on Jun 19, 2018 )
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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