The Indian rupee and government bonds are poised for a volatile yet potentially optimistic week as investors react to evolving expectations surrounding U.S. Federal Reserve interest rate cuts and the latest wave of global trade negotiations.
The rupee surged last week, closing at 85.4750 against the U.S. dollar, clocking a 1.3% weekly gain—its strongest performance in over two years. This rally was largely fueled by a sharp dip in global crude oil prices and broad dollar weakness, setting the stage for cautious optimism in currency and debt markets.
U.S. economic data released on Friday showed a surprise decline in consumer spending for May, even as the PCE Price Index rose by a modest 0.1%, mirroring the previous month’s increase. These signals sparked a shift in market sentiment, with traders increasing their bets on the Federal Reserve beginning rate cuts—possibly as early as September.
The dollar index dropped by 1.5% for the week, reinforcing expectations that the Fed might ease its policy stance in response to signs of economic slowdown. “If the jobs data this Thursday turns out to be weak and trade deals get finalized, we’re likely to see the dollar slide further,” MUFG strategists noted in a recent market brief.
Indian Rupee: Traders Eye Fed, Trade, and Portfolio Inflows
In the short term, analysts expect the Indian rupee and government bonds to exhibit a positive bias, with the rupee anticipated to hover between 85.00 and 85.80. Currency traders are also closely monitoring the impact of portfolio flows, which have shown a steady uptick in recent days.
Investors are now keeping a close watch on U.S. Treasury Secretary Scott Bessent’s comments that several trade deals, involving 18 major trading partners, could be sealed by September 1. If realized, such agreements could inject fresh optimism into global growth forecasts, further driving foreign capital into Indian assets.
Bond Yields in Focus Amid RBI Moves
India’s 10-year benchmark bond yield (6.33% 2035) ended last week at 6.3134%, and is expected to oscillate within a narrow band of 6.28% to 6.35% in the coming sessions. While foreign inflows into Indian government bonds have been modest so far, analysts believe the direction of global interest rates will heavily influence long-term demand.
A significant development in the bond market came on Friday when the Reserve Bank of India (RBI) conducted its first reverse repo auction in seven months, where banks parked a sizable ₹850 billion ($9.95 billion) via a seven-day variable rate reverse repo (VRRR).
“This suggests a strategic pivot by the RBI towards using liquidity tools more actively,” said Kanika Pasricha, Chief Economic Adviser at Union Bank of India. “It could be a move to align the weighted average call rate more closely with the repo rate, enhancing monetary policy transmission.”
There is also speculation about the reshaping of bond supply, with market participants expecting a reduction in ultra-long-term bonds (30- to 50-year maturity) and a pivot towards shorter tenors (up to seven years). Such a shift could improve liquidity and attract more diverse investor interest.
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