Low Risk Appetite to Keep Markets Range-Bound

Debt and currency markets will focus on global cues over the coming week and are likely to trade in a range-bound manner. The 10-year G-sec yield could trade in the 6.71%-6.81% range (6.76% at close on 21 October 2016). The rupee is likely to trade at 66.70/USD-67.30/USD (66.89/USD at close on 21 October 2016).

Bond Rally to be Slow: An incremental rally in the bond market is likely to be slow and protracted, even as underlying fundamentals continue showing improvement in the recent past. A meaningful containment of inflation and inflationary expectations has the potential to open up room for another rate cut by the Reserve Bank of India (RBI) in the near term. However, RBI will increasingly focus on the transmission of previous rate cuts, in order to support growth impulses.

 

Rupee to Face Headwinds: The subdued risk appetite globally will pose headwinds for currency. With foreign investors wary amid tepid domestic corporate sector performance, investment flows are unlikely to revive in a major way in the near term. Additionally, the upcoming FCNR B (foreign currency non-resident) deposits' redemptions and strengthened prospects of the Fed rate hike will keep the rupee bias marginally weak.

RBI's Liquidity Operations Pre-emptive: A shift in interbank liquidity to deficit from surplus led to the RBI announcing INR100bn worth of OMO purchases, in order to alleviate the liquidity crunch. Given the lumpy state borrowings along-with scheduled G-sec borrowings as the system moves towards the period of seasonal liquidity tightness, RBI may continue intervention in order to keep the system in a 'close to neutral' mode.

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