Rupee strained by Trump tariffs; bonds await RBI's policy decision

The Indian rupee this week is expected to be undermined by the fallout of US President Donald Trump imposing tariffs on Mexico, Canada and China, while government bonds will await cues from the central bank's monetary policy decision.

There was little impact on the rupee from India's federal budget on Saturday. Indian shares, which were open for a special trading session, closed lower. [.BO]

Global markets will be set for a jolt on Monday after Trump, in three executive orders, imposed 25 per cent tariffs on Mexican and most Canadian imports, and 10 per cent on goods from China, starting on Tuesday.

 

Mexico and Canada - the US' top two trading partners - retaliated while China said it would take unspecified countermeasures.

The rupee is likely to open at 86.90, below its Friday close of 86.6050 and its lifetime low of 86.6525.

The offshore Chinese yuan, which rupee traders track, declined 0.54 per cent to 7.3585 to the US dollar on Monday. The currency declined 1 per cent last week, already struggling ahead of Trump's tariffs announcement.

The dollar advanced against its major peers and US Treasury yields rose.

"If the tit for tat (related to tariffs) is in the picture, then there will be a huge impact," said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.

China's policymakers have considered allowing the yuan to weaken in 2025 in response to Trump's tariff threats, Reuters reported in December.

Meanwhile, the Reserve Bank of India will announce its policy decision on Friday and is expected to cut rates by 25 basis points.

The benchmark 10-year bond yield ended at 6.7001 per cent on Friday, marginally lower for the week, and also posting a second monthly decline in three.

Traders expect the yield to be in the 6.62 per cent-6.74 per cent range till the RBI's policy decision.

The government said it will target a narrower fiscal deficit of 4.4 per cent of gross domestic product for fiscal year 2025-26, down from a revised target of 4.8 per cent for the current year.

However, the government increased gross borrowing target to Rs 14.82 trillion ($171.26 billion) next year to fund the deficit, compared with Rs 14.01 trillion in the current year.

"Continuing to adhere to the guided fiscal consolidation path even while providing tax relief is a positive feature, which should help improve India's rating upgrade prospects," said Mahendra Kumar Jajoo, CIO - fixed income at Mirae Asset Investment Managers (India).

"RBI is also likely to take note and a progressively more accommodative monetary policy is to be expected in the near term."

Sentiment was also positive after the central bank more than doubled its net purchases of bonds in the secondary market for week ended Jan. 24.

Including these purchases, the RBI has already bought bonds worth around Rs 51,000 crore. It is scheduled to buy bonds worth Rs 40,000 crore more through auctions in February.

Some traders also predicted that the secondary bond market purchases had continued in week ended Jan. 31.