Rupee might appreciate; bond market awaits inflation data

The appreciation of the rupee might continue amid foreign flows in domestic markets, while the bond market awaits retail inflation data for December, to be released on Monday.

On Friday, the currency recorded its biggest weekly gain since May on optimism the demand for emerging market assets would continue due to the prospect of further euro zone stimulus. Consumer Price Index (CPI)-based inflation rose 4.4 per cent year-on-year in November 2014, the slowest pace since January 2012. The decline in inflation was due to cooling international crude oil prices, domestic prices of fruit and vegetables and a favourable base effect. According to economists, because of the vanishing base effect, December inflation could go up.

"The rupee may trade in the range of 62.25 to 62.50 this week, as foreign flows are expected to keep coming in. The Reserve Bank of India (RBI) might continue to mop the flows to build foreign exchange reserves," said the head of treasury of a state-run bank. On Friday, the rupee ended at 62.33, compared with the previous close of 62.67 to a dollar.

RBI's foreign exchange reserves fell $471 million for the week ended January 2 to nearly $320 billion, show data released on Friday.

The yield on the 10-year benchmark bond might also rise if inflation data for December inches up higher than what the market is expecting. "Retail inflation for December should be around 5.5 per cent. If inflation comes beyond 5.5 per cent, then yields could inch up," said Lakshmi Iyer, chief investment officer (debt) and head of product, Kotak Mutual Fund.

The yields fell three basis points on Friday to end at 7.84 per cent. The expectation of bond traders is that the yield could trade in the range of 7.80-7.90 per cent this week. A basis point is 0.01 per cent.