DebtFX: Testing Week for Rupee and Bonds-Ind-Ra

India Ratings and Research (Ind-Ra) believes that several overarching global factors coupled with domestic fragilities could spell bearishness on the rupee and bonds in this truncated holiday week. The rupee is expected to trade between 66.0-66.50/USD this week before consolidating above 66/USD. Last week, we expected the rupee to inch closer to 65.55/USD from 65.26/USD on 30 October 2015. Far from peaking, bond yields are likely to edge higher with the benchmark 10-year G-sec trading in the range of 7.66%-7.75% (7.68% closing on 6 November 2015). In our last Debt-FX, we indicated that 10-year benchmark is expected to stay in the 7.59%-7.69% range for the previous week. This range held throughout, with yield firmly being capped at 7.69% on account of value buying.

Furthermore, the sub-national curve, in form of state development loans (SDLs), is likely to register widening of spreads to 40-45bp this week as against 30-35bp seen over the previous fortnight. There is a huge supply burden as 20 state governments are poised to raise a total of INR187bn on 10 November through an SDL auction, making it the largest size of notified issuance since 2009. This comes at a time when foreign portfolio investment (FPI) limit is exhausted for SDLs and the appetite of domestic investors remains low even for sovereign securities.

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