The Indian Rupee traded at 94.40 per US dollar on Monday, marginally lower than its close at 94.32 on Friday, as the currency held steady in a narrow trading band. According to The Economic Times, the rupee has been hovering near its strongest level in over a month in recent trading sessions, supported by Brent crude oil prices falling about 1.5% to $79.4 per barrel, well below their conflict-period peak of $126.4 hit in late April. The currency's performance comes as easing U.S.-Iran tensions lowered oil prices, boosting sentiment, while importer hedging flows limited gains in the rupee. The rupee has climbed about 1.2% over the past six sessions, demonstrating sustained strength amid favorable market conditions, though anticipation of potential U.S. Federal Reserve rate hikes kept traders watchful.
Brent crude oil prices fell about 1.5% to $79.4 per barrel, providing substantial relief to the Indian economy which is the world's third-largest oil importer. As reported by The Economic Times, a joint statement from mediating nations Qatar and Pakistan said the U.S. and Iran agreed to a roadmap toward a final deal within 60 days, following the first round of talks between U.S. and Iranian officials in Switzerland. However, while a sharp drop in oil prices has offered some comfort to Asian energy importers, the risks of higher U.S. interest rates have tempered hopes of a sustained relief rally. Oil prices had been on a downward trend after the US and Iran struck an interim peace deal, with Washington agreeing to lift its blockade on Iranian ports and Tehran committing to restore tanker flows through the Strait of Hormuz. Oil prices mirrored the volatility, once climbing past $82 on concerns over the deal, before settling lower on Iran's positive comments.
Hawkish expectations for U.S. Federal Reserve policy have tempered hopes of a sustained relief rally for Asian currencies, including the rupee. According to The Economic Times, Frederic Neumann, chief Asia economist at HSBC, said in a note that monetary officials will remain on guard in Asia: a bouncy U.S. dollar means that there is little reprieve for now, with a tightening bias still needed for most. India's rate panel kept rates on hold earlier this month to assess whether higher oil and food prices are likely to lead to more generalised inflation. Analysts at HSBC expect the central bank to deliver 50 basis points of hikes in the second half of the year, adding to the pressure on Asian currencies. The dollar index rose 1.1% last week to its highest level in a year, while U.S. two-year Treasury yields climbed after the Fed's policy update reinforced expectations of tighter monetary policy.
Recent steps by the central bank to buoy the currency have continued to provide significant support, with Indian policymakers rolling out a series of measures aimed at attracting dollar inflows. According to The Economic Times, overseas investors have poured more than $2 billion into domestic bonds over the past eight sessions, already surpassing the year-to-date inflows recorded before the measures were announced. Foreign investors have bought ₹213.5 billion ($2.26 billion) of bonds so far this month, most of it after the RBI's June 5 measures to boost inflows, with purchases already reaching a 15-month high. Average daily foreign equity outflows have moderated to ₹22.6 billion ($239.30 million) since the announcement, compared with ₹45.12 billion during the period from the start of the Iran conflict at the end of February to June 5. One of the key steps, removing taxes on investments in Indian bonds, is already showing measurable results in attracting foreign investment.
The yield on India's 10-year benchmark bond ended at 6.8533% on Friday, down 5 basis points for the week, posting its fourth consecutive weekly decline. According to The Hindu BusinessLine, bonds rose as oil prices slumped after the peace deal and as foreign inflows into securities continued, aided by the central bank's measures two weeks ago. Traders expect the 10-year bond yield to move within a 6.80%-6.90% range this week, with the focus on oil prices and foreign flows. However, yields gave up some of their declines on Friday and ended higher for the day on profit-booking. While government bond yields could move lower in the near term, we do not expect a material or sustained decline, said Anurag Mittal, senior executive vice president & head of fixed income, UTI AMC. From the Asian bond investor's perspective, India remains one of the higher-yielding investment-grade bond markets. It is highly liquid and significant progress has been made in its settlement process.
