Rupee seen down on global risk aversion, bonds stable ahead of policy review

After taking the biggest plunge in a year, the rupee may continue to tumble as risk-wary investors wait upon the events this week.

The outcome of the two-day meeting of the Group of Seven leading economies, the Federal Reserve's measures to revive the US economy, and announcements on domestic industrial growth and inflation data would decide the future course.

"The news flow is very erratic and the market is now very anxious, so it could be either risk-on or risk-off. There's not enough guidance at this point of time, given the event flows this week," said Priyanka Kishore, foreign exchnage strategist at Standard Chartered Bank.

On Friday, the rupee closed at 46.57 against the dollar, down by 1.7 per cent over a week as share markets fell and the dollar strengthened across its major counterparts, after the announcement of the proposed jobs boosting plan worth $447 billion by US President Barack Obama.

"From here on, it will depend on sentiments. If the dollar becomes stronger against the other currencies, especially the euro, you could see further rupee depreciation," said Ashish Parthasarthy, head of treasury at HDFC Bank. He expects the rupee-dollar pair to range between 45.80 and 46.80, amid volatile foreign exchange markets.

"It is important for RBI to ensure the rupee stays within the medium/long-term range of 44-47 to avoid explosive price volatility," wrote Moses Hardings, head of global markets at IndusInd Bank in a note. Last week, RBI deputy governor Subir Gokarn had said the central bank would intervene in the foreign exchange market only to arrest high volatility, if required, and not to fix an exchange rate.

In the domestic bond market, traders would be cautious ahead of the mid-quarterly review of credit and monetary policy by RBI scheduled on September 16. "The expectation is of a steady trend in growth and uptrend in inflation," said Harding. Yields on the 10-year benchmark 7.80 per cent bond closed at 8.31 per cent on Friday, down four basis points from 8.35 per cent last week.

Liquidity is expected to tighten as the deadline to make advance tax payments falls this week. Bank borrowings from RBI's repo window may go up to Rs 1 lakh crore. On Friday, banks borrowed around Rs 60,510 crore under the liquidity adjustment facility.