Indian rupee, bonds eye Fed decision, rate outlook

Business Recorder reported that the Indian rupee may stay under strain this week, as Brent crude trades over $100 per barrel and bets on a US Federal Reserve rate increase intensify. The currency shed more than 1% over the previous week and ended Friday at 95.55 per dollar. Indian markets were closed on Monday for a local holiday, and data released that day showed India's consumer inflation at 4.82% for August.

Supply worries followed fresh strikes on Saudi energy facilities and attacks on vessels in the Middle East. Markets are pricing in a high probability of a 25-basis-point Fed hike on Wednesday, and ING described last week's hotter consumer inflation figures as having almost guaranteed that move. Record FX reserves of $785 billion, however, support expectations that the monetary authority will intervene to limit sharp swings.

The benchmark 10-year bond yield rose for a fourth consecutive week to end Friday at 7.0233%, and the central bank plans open market sales of 1 trillion rupees this fortnight. Liquidity is abundant after lenders raised $127 billion under the special forex scheme, pushing overnight rates below the floor of the policy corridor. Traders expect the yield to trade between 6.98% and 7.10% this week.