MUMBAI (Reuters) – Indian financial markets, particularly the rupee and government bonds, are poised for volatility this week, primarily driven by fluctuations in oil prices amid ongoing Middle East tensions. Traders are also closely monitoring upcoming inflation data from both India and the United States for potential cues on interest rate policies.
The Indian rupee concluded last week at 95.2075 per dollar on Friday, registering a modest gain of approximately 0.2% week-on-week. This slight appreciation followed data released on Friday indicating an unexpected decline in U.S. jobs in July, which prompted traders to reduce their expectations for Federal Reserve rate hikes. This sentiment, in turn, led to a decrease in Treasury yields and a weaker dollar.
Geopolitical developments in the Middle East continue to be a significant concern. Iran announced on Sunday that a deal concerning new shipping lanes in the Strait of Hormuz is nearing finalization. However, the nation reiterated that this crucial energy route would only be reopened once the U.S. fulfills other stipulated conditions. The instability in energy prices resulting from these uncertainties has kept inflation trends at the forefront of traders’ minds, with both the U.S. and India scheduled to release their consumer inflation data this week.
A Reuters poll of 40 economists projects that India’s annual consumer price index (CPI) inflation rate will climb to 4.50% in July, up from 4.38% in June. This comes after the Reserve Bank of India (RBI) opted to maintain policy rates last week. Analysts at ANZ foresee the central bank implementing at least two 25-basis-point rate hikes, commencing in December 2026. ANZ stated, “Rising inflation expectations, elevated global commodity prices and resilient domestic demand suggest underlying inflation could build faster than the RBI currently anticipates.”
Regarding government bonds, a period of narrow-range trading is anticipated following a recovery experienced last week. Market participants are keenly awaiting domestic inflation figures. Bond yields saw their first decline in five weeks, influenced by a drop in oil prices and a more dovish stance from the RBI. The benchmark 10-year yield finished at 6.7651% on Friday, marking a 7 basis point reduction for the week, after having increased by 12 basis points over the preceding four weeks. Traders predict the benchmark yield will trade within the 6.74%-6.82% range this week.
The RBI recently revised its forecast for core inflation, lowering it by 40 basis points to 4.3% for the current fiscal year, and modestly reducing its headline inflation projection by 10 basis points to 5%. Governor Sanjay Malhotra also affirmed the central bank’s commitment to ensuring sufficient liquidity within the banking system.
Vishal Kaushal, head of global markets, India, at Crédit Agricole CIB, commented, “The key signal was RBI’s willingness to look through temporary supply-side inflation shocks unless they become broad-based and persistent.” He added, “Geopolitical developments in West Asia and their impact on commodity prices and global yields are likely to largely determine the trajectory of bond yields in the near term.”
Key economic indicators to watch this week include:
India:
* July retail inflation data (August 12, Wednesday, 4:00 p.m. IST) – Reuters poll forecast: 4.50%
* July wholesale inflation data (August 14, Friday, 12:00 p.m. IST) – Reuters poll forecast: 9.95%
U.S.:
* July existing home sales (August 11, Tuesday, 6:00 p.m. IST)
* July consumer price and core inflation data (August 12, Wednesday, 6:00 p.m. IST) – Reuters poll forecast: 3.4%
* July PPI machine manufacturing (August 13, Thursday, 6:00 p.m. IST)
* Initial weekly jobless claims for the week to August 8 (August 13, Thursday, 6:00 p.m. IST)
* July retail sales (August 14, Friday, 6:00 p.m. IST)
* August U-Mich sentiment prelim (August 14, Friday, 7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Janane Venkatraman and Rashmi Aich)
