Hawkish MPC, West Asia conflict cloud rupee, bond yield outlook

The Monetary Policy Committee (MPC) minutes from their latest review have raised concerns about the rupee and bond yield outlook, due to hawkish signals and the escalating conflict in West Asia. Additionally, the possibility of increased sugar imports could further impact the currency's performance.

However, a positive factor for the rupee is the substantial influx of foreign currency through the special swap facility. India has received $72.8 billion in dollar inflows, providing the central bank with a buffer to manage any currency pressure. The rupee is expected to trade within the range of 95.50 to 96.00, while the 10-year bond yield is anticipated to trade with a negative bias, around 6.85%.

The hawkish tone of the MPC minutes may take some time for the market to adjust, with the 10-year yield expected to fluctuate between 6.87% and 6.88%. If there are further crude shocks, the yield may move upwards. Gopal Tripathi, head of treasury at Jana Small Finance Bank, noted that global bonds, particularly US rates, are also trading with a negative bias, which has an impact on domestic markets.

The August MPC minutes indicated a more hawkish stance, with members warning that a broadening of inflation pressures could lead to a rate hike or policy adjustment. Meanwhile, US Treasury yields experienced a sharp decline following an announcement of doubling their buybacks of longer-dated debt. However, the rally was short-lived, as the 10-year yield rebounded to near 4.70% and the 30-year yield to around 5.24% by Friday.