Rupee gains on jobs data, bond prices down on rate hike agenda

The rupee strengthened to its two-month high, as dollars pertaining to bonds raised by Reliance Industries (RIL) continued to pour into the country alongside some inflows into Indian equities

The Indian rupee strengthened against the US dollar, while bond prices weakened on Monday, led by different considerations.

The Indian currency closed at 74.038 a dollar, up from its previous close of 74.31 a dollar. Currency dealers say the Reserve Bank of India (RBI) let the rupee appreciate at first but later intervened to mop up the excess supply of the US unit.

The dollar generally remained weak against other currencies after jobs data for December showed that the US added just about half of over 400,000 expected in the labour force. But the unemployment rate, a key gauge, fell below 4 per cent, keeping the rate hike probabilities unchanged, said CR Forex.

The general weakness in the US dollar was also reflected in the region, with most currencies strengthening against the greenback. Both the Indian rupee and the Indonesian rupiyah strengthened 0.36 per cent each against the dollar on Monday.

Meanwhile, the rate hike agenda of the US Fed, and the usually coordinated move by the RBI meant that the bond market braced for rate hikes, as reflected by the rise in bond yields.

The 10-year bond yield closed at 6.59 per cent, up from its previous close of 6.54 per cent, on concern over monetary policy tightening.

The bond markets have witnessed a sharp sell-off, which started last week.

The sell-off in Indian bonds was triggered by a global rout in bonds and a surge in crude oil prices, Kotak Mahindra Bank Economists Upasna Bhardwaj and Anuragh Balajee noted in a report.

Hawkish Fed minutes, indicating faster normalisation, pushed up the 10-year US bond yield by 28 basis points, while crude oil prices rose 5 per cent from last week.

“Further weighing on market sentiment is RBI’s intermittent OMO sales in the secondary market (Rs15,500 cr since late October 2021). The devolvement of the 5-year bond (5.74% GS 2026) further confirmed the increasing stress. Markets now await the announcement of a new 10-year benchmark and the inflation data this week,” the duo wrote.

However, both bond and currency dealers said that the domestic markets will likely remain choppy till the announcement of the Union Budget on February 1.

“There is no clarity on India’s bond inclusion in global bond indices. Some of that clarity can come during the Budget. If there is any positive indication, it will be positive for both the bond and the rupee. Till then, a little sideways movement is expected,” said the head of treasury of a private sector bank.

Bond dealers expect the 10-year yield to remain steady at around the present level.

“Technically, the USDINR spot pair has breached the support of 200-Daily Moving Average at 74.30 levels indicating a continuation of the bearish trend up to the support zone at 73.90-73.75 levels. Resistance zone is at 74.18-74.30 levels,” said Sriram Iyer, a senior research analyst, Reliance Securities.

“The USDINR Spot pair could trade in a range of 73.88-74.30 levels in the coming session,” Iyer said.