Bond Gains to Halt; Rupee Anchored

The appointment of Dr Urjit Patel as the new Reserve Bank of India (RBI) Governor signals the reassertion of policy continuity by policy makers. Bond gains are likely to halt and the currency will continue to face global risk shifts. The 10-year yield is likely to trade at 7.08%-7.18% (7.10% at close on 19 August) and the rupee's trading range is likely to be 66.65/USD-67.25/USD (67.06/USD at close on 19 August) this week.

The RBI's ongoing approach towards monetary policy has been reinforced by the appointment of Dr Patel. Dr Patel chaired the committee that recommended the 'inflation-targeting' mechanism in 2014 and also led the monetary policy department at RBI. Hence, the agency believes that the policy approach will remain unchanged in the short term.

Debt Market Momentum to Halt: The rally in the bond market since the beginning of July 2016 was led by several positives: benign global conditions, low crude oil prices and adequate domestic liquidity. The agency believes that in the absence of meaningful triggers, debt investors are likely to be in a 'wait and watch' mode. Further cuts in the repo rate are unlikely to take place in the near future until retail inflation sustainably moderates. In the absence of any incremental positive developments and limited scope for open market operation purchases, upward bias for bond yields remains.

Rupee Bias to Stay Positive: The agency believes market perception of Dr Patel as an 'inflation hawk' will anchor the rupee's near-term movement. Additionally, global conditions are reasonably conducive to the rupee's strength. Mixed signals from US policymakers over the timing of the next Fed rate hike have reined in the USD's strength. Fed Chair Janet Yellen's speech at the Jackson Hole symposium on 26 August could provide insights into the Fed's own assessment of the US economy. Downside risks for the rupee are likely to emerge on two counts: 1) weak foreign portfolio flows and 2) the potential resurgence of risk-off sentiment.

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