MUMBAI, May 4 (Reuters) – This week, the Indian rupee and government bonds are under fresh pressure as ongoing tensions in the U.S.-Iran conflict keep oil prices high, impacting capital flows into the energy-importing country.
On Thursday, the rupee dipped to a record low of 95.33, driven down by fluctuating oil prices and tough remarks from the U.S. Federal Reserve. Financial markets in India were closed on Friday for a local holiday.
Market analysts mention that the rupee may continue to struggle due to weak economic indicators, although they are wary of how much the central bank may intervene to stabilize it.
The U.S. and Israel paused their bombing campaigns against Iran four weeks ago but seem far from reaching a resolution. Recently, President Donald Trump hinted he might turn down a peace proposal from Iran and suggested the possibility of resuming air strikes.
This conflict is also affecting the currencies of other nations that rely heavily on oil imports, like Japan, Indonesia, the Philippines, and Thailand. Reports indicate that Japan intervened last week to support the yen against the U.S. dollar.
“Our view is that the Indian rupee remains at risk if the conflict in the Middle East persists, even as we believe there might be some gradual easing,” MUFG stated in a recent note.
They foresee the rupee fluctuating between 95 and 96, but a prolonged conflict could push it to 97-98.
Finance representatives from China, Japan, South Korea, and the group of ASEAN nations are keeping a close eye on risks from unstable financial markets and are ready to act if necessary.
BONDS
India’s 10-year benchmark bond, which rose by 7 basis points to 7.0148% last week, is anticipated to show further gains. Analysts expect the yield on this bond to range between 6.96% and 7.10% this week, following its largest weekly increase in four weeks.
Last week, the average price of Brent crude oil reached a four-year high, as the U.S. plans to continue blocking Iranian ports. Iran has also threatened to shut down the vital Strait of Hormuz, which before the conflict, was responsible for about 20% of global oil flow.
Currently, the benchmark Brent crude is priced around $108 per barrel, representing a 50% increase since the conflict started on February 28.
Vikas Garg, head of fixed income at Invesco Mutual Fund, remarked, “The market is currently dealing with negative sentiment due to the ongoing conflict in the Middle East, which has led to a sharp correction in the markets. If there is a positive resolution, we might see a quick rebound toward the 6.80% to 6.85% range; otherwise, yields may rise further if the conflict drags on.”
Meanwhile, foreign investors returned to the bond market last month after significant selling in March and early April, purchasing bonds worth 52.6 billion rupees ($554.33 million) in April, following net sales of 177 billion rupees in March, marking the highest outflow in six years.
KEY INDICATORS:
India:
- April HSBC Manufacturing PMI – May 4, Monday (10:30 a.m. IST)
- April HSBC Services PMI – May 6, Wednesday (10:30 a.m. IST)
U.S.:
- March Factory Orders – May 4, Monday (7:30 p.m. IST)
- March International Trade – May 5, Tuesday (6:00 p.m. IST)
- April S&P Global Composite and Services PMI Final – May 5, Tuesday (7:15 p.m. IST)
- March ISM Non-Manufacturing PMI – May 5, Tuesday (7:30 p.m. IST)
- March New Home Sales Units – May 5, Tuesday (7:30 p.m. IST)
- Weekly Jobless Claims for the Week Ending May 2 – May 7, Thursday (6:00 p.m. IST)
- April Non-Farm Payroll and Unemployment Rate – May 8, Friday (6:00 p.m. IST)
- May U-Mich Sentiment Prelim – May 8, Friday (6:00 p.m. IST)
($1 = 94.8900 Indian rupees)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Nivedita Bhattacharjee and Rashmi Aich)
