India FX traders eye oil prices, RBI defence; bonds bulls await index call

The rupee closed at 96.28 per dollar on Friday, down ​about 1% on the week, its steepest drop since May, the month in which the currency hit its all time-low of ‌96.96

The Indian rupee's trajectory this week will hinge on crude oil prices and the extent to which the central bank defends the currency as it nears record-low levels, while bond traders await a decision ​about inclusion in a global debt index.

The rupee closed at 96.28 per dollar on Friday, down ​about 1 per cent on the week, its steepest drop since May, the month in which the currency hit its all time-low of ‌96.96.

Intensifying conflict between the United States and Iran has choked the Strait of Hormuz, a key artery for Asian energy supplies, exposing large energy importers such as India to macroeconomic turbulence due to supply disruptions.

 

Traders expect the rupee to trade below the psychologically important 96 level this week, unless the central bank intervenes firmly to shore up the currency.

"If Brent crude prices continue to keep rising and cross $95 per barrel, rupee would be prone to fresh all-time lows," an FX salesperson at a foreign bank said.

Over the weekend, the US said it had completed an eighth consecutive night of attacks against Iran. The US and Iran have intensified attacks since an interim ceasefire deal fell apart, raising the possibility of a return to all-out war.

"At this stage, risks are clearly skewed to the upside for both FX volatility and the dollar," analysts at ING said in a note. The dollar index dipped 0.2 per cent last week.

With little economic data due for ‌release, the focus will also be on foreign portfolio flows into Indian assets after a series of recent policy measures to boost them. Overseas investors have net bought $2.3 billion of local stocks and bonds over July so far.

BONDS

Government bonds tumbled last week as a spike in oil prices raised inflationary pressures and uncertainty persisted over the inclusion of Indian bonds in a key index.

The 10-year benchmark yield ended at 6.7799 per cent on Friday. The yield had fallen by as much as aggregate of 34 basis points over six weeks ended July 3, before settling flat in the following week and then jumping by 7 bps.

Traders expect the benchmark yield to move within the 6.72 per cent to 6.80 per cent range this week, with focus ​on whether Indian debt is added in the Bloomberg Global Aggregate Index.

In January, Bloomberg Index Services said that it will make the next announcement ‌in mid-2026.

Foreign investors have net bought more than $4.3 billion of bonds in the last seven weeks, starting June 1, under the so-called fully accessible route. These notes are part of three emerging market debt indexes.

"We will continue to see intraday trades, with the 10-year yield ​moving between 6.70 per cent-6.85 per cent range, ‌and index inclusion development acting as a major directional trigger," said Avnish Jain, CIO for fixed income at Canara Robeco Mutual Fund.

Meanwhile, India's retail inflation ‌rose above the central bank's medium-term 4 per cent target in June, but some brokerages trimmed their rate hike projection for 2026, while Capital Economics and ICICI Securities Primary Dealership eye hikes this year.

"The timing of any policy response remains highly data dependent, which makes the current ‌macro environment ​challenging," said Krishna ​Bhimavarapu, APAC economist at State Street Investment Management.