Strengthening prospects of an imminent rate hike by the US Fed will keep investors' risk appetite reined in and may result in domestic market sentiments staying cautious this week, says India Ratings and Research (Ind-Ra). The 10-year G-sec yield could trade in the 6.71%-6.80% range (6.73% at close on 14 October 2016). The rupee is likely to trade at 66.45/USD-67.10/USD (66.73/USD at close on 14 October).
Global Conditions to Keep Momentum Reined In: Ind-Ra believes the sharp drop in retail inflation (4.3% in September 2016, 5.05% in August 2016 and 6.07% in July 2016) strengthens the prospects of a rate cut by the Reserve Bank of India. However, with risks emerging from the Fed rate hike probability and a potential surge in oil price, market is likely to stay cautious amid constructive domestic conditions.
Liquidity to Stay Neutral: Ind-Ra believes the RBI's liquidity management will alleviate most pressure on overnight rates apart from frictional volatilities.
Ind-Ra believes proactive measures by the RBI such as open market operations, G-sec purchase could be resorted to, if liquidity shifts into a deficit. The impact on money market instruments, however, is unlikely to be major.
Testing Period for Rupee: Ind-Ra expects the rupee to undergo a period of volatility in the upcoming weeks on account of both domestic and global conditions. As redemptions of FCNR occupy the centre-stage of demand-supply dynamics domestically, investors' risk aversion globally is likely to keep the environment for rupee challenging. Ind-Ra believes the rupee will be shielded from the sharp depreciation episodes witnessed earlier.
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