By Dharamraj Dhutia and Nimesh Vora
MUMBAI (Reuters) – The Indian rupee and government bonds will react to the U.S. Federal Reserve’s policy outcome this week, along with data that will provide cues on how the world’s largest economy fared.
Another crucial marker for yields will be whether the Reserve Bank of India (RBI) starts selling bonds via open market operations (OMO) this week.
The rupee is expected to continue in the 83.0650 to 83.2550 per U.S. dollar range it held last week. It ended at 83.2450 on Friday.
While the Fed is widely expected to keep interest rates unchanged at the end of its meeting on Wednesday, the focus will be on Chair Jerome Powell’s commentary.
“We expect the Fed to recognise the recent strength in economic activity but, with tightening financial conditions, to soften its guidance about the need for additional tightening,” Morgan Stanley said in a note.
After last week’s strong third-quarter U.S. GDP data, the ISM manufacturing data for October on Wednesday and non-manufacturing and monthly jobs data on Friday will help investors assess if the economy sustained that momentum.
Traders also await the Bank of Japan’s and Bank of England’s policy decisions this week.
Meanwhile, the Indian 10-year benchmark bond yield ended flat at 7.3576% last week, as oil prices and U.S. yields eased.
Market participants expect the benchmark bond yield to trade in the 7.30%-7.42% range this week.
The focus will be on whether the RBI starts OMO sales this week as liquidity improves.
“We expect the banking system liquidity to move into surplus by the end of this month or early next month, which could prompt the RBI to conduct OMO sales,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
“However, external sector headwinds remain elevated and the liquidity conditions will remain tight through most of this quarter. Hence, we do not see the need for aggressive OMO sales immediately.”
Since the RBI laid out plans earlier this month to sell bonds via auctions to absorb banking system liquidity, the liquidity has largely stayed in deficit. That has increased the uncertainty over the timing of the first sale.
While the core durable liquidity is amply in surplus, the banking system liquidity remains tight. The festive-linked currency leakage along with limited government spending is expected to keep liquidity tight, Bhardwaj said.
Indian bond yields have remained elevated since the RBI unveiled its plan. Market participants expect OMO sales of 500 billion rupees this quarter.
The RBI will conduct sales once government spending picks up and the durable liquidity surplus improves, Reuters reported It will meet some banks this week to likely discuss the prevailing liquidity situation among other things.
** Bank of Japan interest rate decision – Oct. 31, Tuesday (Reuters poll: No change expected)
** India Sept fiscal deficit – Oct. 31, Tuesday (3:30 p.m. IST)
** India Sept infrastructure output – Oct. 31, Tuesday (5:30 p.m. IST)
** U.S. Oct consumer confidence – Oct. 31 Tuesday (7:30 p.m. IST)
** India Oct S&P Global Mfg PMI – Nov. 1, Wednesday (10:30 a.m. IST)
** U.S. Oct S&P Global Mfg PMI – Nov. 1, Wednesday (7:15 p.m. IST)
** U.S. Oct ISM manufacturing PMI – Nov. 1, Wednesday (7:30 p.m. IST)
** U.S. Fed Federal Reserve policy decision – Nov. 1, Wednesday (11:30 p.m. IST) (Reuters poll: No change expected)
** Bank of England interest rate decision – Nov. 2, Thursday (5:30 p.m. IST) (Reuters poll: No change expected)
** U.S. initial weekly jobless claims week to Oct. 23 – Nov. 2, Thursday (6:00 p.m. IST)
** U.S. Sept factory orders – Nov. 2, Thursday (7:30 p.m. IST)
** India Oct S&P Global Services PMI – Nov. 3, Friday (10:30 a.m. IST)
** U.S. Oct non-farm payrolls and unemployment rate – Nov. 3, Friday (6:00 p.m. IST)
** U.S. Oct S&P Global services and composite final PMI – Nov. 3, Friday (7:15 p.m. IST)
** U.S. Oct ISM non-manufacturing PMI – Nov. 3, Friday (7:30 p.m. IST)
(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Savio D’Souza)