The rupee closed at 95.38 on Friday, marking its biggest weekly gain since March. Reserve Bank of India interventions lifted the currency to a three‑week high, giving traders confidence in the market’s stability.
Analysts say the RBI is likely to keep rates unchanged this week. Moderate inflation and strong dollar inflows, supported by balance‑of‑payments measures, give the central bank room to hold borrowing costs.
Goldman Sachs noted that the rupee’s recent stabilization reduces the need for the Monetary Policy Committee to adopt a hawkish stance. The firm forecasts 25‑basis‑point rate hikes in October and December.
The rupee is expected to strengthen further after U.S. President Donald Trump said Washington would pause new attacks on Iran if a deal is reached soon. Lower oil prices and continued dollar inflows also support the currency.
Bloomberg’s decision to defer the inclusion of Indian government bonds in its Global Aggregate Index may weigh on the rupee. Investors are watching the impact of this move closely.
Central bank data showed that India’s foreign exchange reserves rose to a two‑month high. Outstanding forward dollar liabilities fell at the end of June, aided by nearly $41 billion raised under balance‑of‑payments measures.
Government bonds are likely to weaken in the first half of the week after Bloomberg’s deferral. Most participants had already priced in the inclusion, so sentiment has dented.
Last week, bonds fell and yields rose for a third consecutive week, pressured by volatile oil prices and rising uncertainty over index inclusion. The 10‑year benchmark yield ended at 6.8343% on Friday.
Traders expect the benchmark yield to trade between 6.80% and 6.92% this week, at least until the RBI’s policy decision. The central bank’s commentary will be the major trigger.
Hemant Mishr, founder and CIO of S Cube Capital, said the decision is a near‑term disappointment for investors who had priced in India’s inclusion. He added that the index provider wants to see reforms sustained.
Foreign investors net sold bonds worth almost $600 million in the last six sessions, marking the biggest weekly outflow in four months. This outflow was driven by uncertainty over oil prices and index inclusion.
Despite this, foreigners remained net buyers of $3.9 billion of FAR bonds between June 1 and July 31. Debt under FAR is part of three emerging‑market debt indexes.