Rates are widely expected to stay unchanged on August 5, while traders watch whether the central bank addresses inflation pressures from higher oil prices and weaker rainfall.
The Indian rupee and government bonds are set to take direction from the Reserve Bank of India's policy decision this week, with rates widely expected to remain unchanged. The rupee closed at 95.38 on Friday, its biggest weekly gain since March and a three-week high, after persistent RBI intervention helped steady the currency. Modest inflation and strong dollar inflows, supported by measures to bolster the balance of payments, are giving the central bank room to hold borrowing costs even as elevated oil prices and weak rainfall keep inflation risks alive. Goldman Sachs said it sees limited need for the Monetary Policy Committee to turn more hawkish near term and expects 25-basis-point rate increases in October and December. Traders also expect some support from lower oil prices after U.S. President Donald Trump said Washington would hold off on fresh attacks on Iran if a deal is reached soon. Government bonds, however, are likely to weaken early in the week after Bloomberg Index Services deferred Indian government bond inclusion in its Global Aggregate Index, denting sentiment and contributing to a third straight weekly rise in yields. The 10-year benchmark yield ended at 6.8343% on Friday, and traders expect it to move in a 6.80%-6.92% range this week until the RBI decision. Foreign investors sold nearly $600 million of bonds in the last six sessions under the fully accessible route, though they remained net buyers of $3.9 billion of FAR bonds between June 1 and July 31. India’s foreign exchange reserves rose to a two-month high in the latest reporting week, while the RBI’s outstanding forward dollar liabilities fell at the end of June, helped in part by nearly $41 billion raised under measures to strengthen the country’s balance-of-payments position.