Rupee faces NDF pressure as bonds watch demand-supply before quarter-end

The Indian rupee may face headwinds this week from maturing non-deliverable forward (NDF) positions, while bond traders would watch demand-supply dynamics and foreign investor activity. The rupee closed at 89.85 per dollar ‍on Friday, down 0.6 per cent for the week, ​as persistent corporate hedging eroded an intervention-led rebound from near record lows. Traders said the rupee could slip past 90 per dollar again this week, and without central bank support, may test 91.

"The cycle of elevated dollar demand from NDF maturities is likely to resume, leaving the currency exposed," a trader at a large private bank said. Year-end thinning in trading volumes could amplify flow-driven moves, the trader added.

 

Beyond the immediate cues, stalled India-US trade talks and ​foreign portfolio outflows continue to weigh on the rupee despite RBI intervention, said Anil Bhansali, head of treasury at Finrex Treasury Advisors. Foreign investors are on track to pull out a record roughly $18 billion from local stocks this year. Global market activity is expected to be subdued as investors await minutes from the US Federal Reserve's December policy meeting for cues on the future path of interest rates.

The 10-year benchmark 6.48 per cent 2035 yield

settled at 6.5637 per cent, down 4 basis points on the week. Traders expect the yield to move in a 6.52 per cent-6.63 per cent range, with continued attention on the overall demand-supply scenario and foreign flows.

The 10-year bond yield hit 6.70 per cent last week but has since cooled off after the Reserve Bank of India announced it would purchase bonds worth ₹2 trillion ($22.28 billion) over four weeks, including ₹50,000 crore on Monday.

Some traders also speculated that the RBI was an active buyer in the secondary market before announcing the liquidity package.

"Given it is also likely that the RBI could have intervened on screen, this could be ‌taken as a sign of the central bank's discomfort ​with the pace of rise in bond yields despite a somewhat dovish policy decision earlier this month," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

"Absent significant pressure on the FX side in the next quarter, the RBI may not need to intervene more from liquidity standpoint."

Pressure on bonds persists as foreign investors continue to pare ‍positions ahead of year-end, with net selling of ₹13,500 crore so far in December.

Still, Matthew Kok, portfolio manager for Asian fixed income at Eastspring Investments, said it makes sense to hold government bonds in ‍portfolios ‌benchmarked in local ​currency.