Indian rupee, bonds seen under pressure amid energy supply worries
Synopsis
The Indian rupee and government bonds are expected to remain under pressure as the Iran conflict disrupts global energy supplies and pushes oil prices higher.
The Indian rupee and government bonds could face another challenging week as the war involving Iran disrupts global energy supplies and dampens investor appetite for emerging market assets.
Key highlights
- Indian rupee hit a record low of 92.4750 last week
- Rising oil prices from the Iran conflict weigh on emerging markets
- Goldman Sachs sees rupee weakening to 95 over the next 12 months
- RBI intervention helping limit volatility in currency and bond markets
- India’s 10-year bond yield ended at 6.6798% on Friday
Rupee pressured by oil price surge
The Indian rupee touched a record low of 92.4750 last week, with further losses largely prevented by intervention from the Reserve Bank of India (RBI).
Oil prices surged above $100 per barrel after military actions disrupted energy shipments through a key global supply route.
Meanwhile, the United States has rejected diplomatic efforts by Middle Eastern allies to end the conflict and has threatened additional strikes on Iran’s Kharg Island oil export hub.
Safe-haven demand lifts the dollar
The US dollar strengthened by about 1.6% last week as investors moved toward safe-haven assets amid concerns about a potential global energy supply disruption.
Analysts at Goldman Sachs said higher energy prices pose a significant risk for India.
“India faces a material terms-of-trade shock from higher energy prices, with meaningful spillovers via trade, energy supply chains and remittances,” the firm said in a note.
Goldman Sachs expects the rupee to weaken to 95 over the next 12 months, compared with its earlier forecast of 94.
RBI likely to manage volatility
Market participants expect the RBI to remain active in foreign exchange markets to limit excessive volatility in the rupee.
However, traders believe the central bank may avoid defending specific currency levels if oil prices remain elevated.
Foreign portfolio outflows could add further pressure on the currency, with overseas investors already net selling more than $5.5 billion of Indian equities in March.
Bond market supported by RBI purchases
India’s benchmark 10-year government bond yield ended at 6.6798% on Friday, supported by strong purchases from investors including the central bank.
Traders expect the yield to trade within a 6.62% to 6.72% range this week.
The RBI net purchased bonds worth 572.10 billion rupees in the week ended March 6, marking the largest weekly buying on record as it attempted to stabilize markets unsettled by the Middle East conflict.
Market participants said the central bank also remained active during the week ended March 13.
Swap markets signal risk concerns
Despite relatively stable bond yields, overnight index swap (OIS) rates have been rising sharply, reflecting increased hedging activity by investors.
Analysts say the swaps market may be overstating the potential impact of the conflict on India’s monetary policy.
“There does not seem to be a case for any reversal of policy stance,” said Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Mutual Fund.
“If external dynamics worsen and fears of imported inflation increase, the RBI may need to reassess the extent of liquidity support being provided,” he added.
He noted that while the bond market has remained anchored by RBI purchases, investors are continuing to hedge risks through swaps.
Key events to watch include:
India February WPI inflation data (March 16, Monday); Reuters poll: 2.00%
United States February industrial production data (March 16, Monday)
FAQs
Q1: Why is the Indian rupee under pressure?
The rupee is facing pressure due to higher oil prices and global energy supply disruptions linked to the Iran conflict, which affect India’s import costs.
Q2: What is Goldman Sachs’ forecast for the rupee?
Goldman Sachs expects the rupee to weaken to around 95 against the US dollar over the next 12 months.
Q3: How is the RBI supporting markets?
The RBI has been intervening in currency markets and buying government bonds to stabilize financial conditions.
Q4: What factors will move markets this week?
Oil prices, developments in the Middle East conflict, foreign investment flows and upcoming economic data will likely influence the rupee and bond markets.
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I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
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