Rupee, bonds under pressure as oil stays above $100 and Fed hike looms

Pressure on the Indian rupee is expected to continue this week due to oil prices remaining above $100 per barrel and indications of a US Federal Reserve rate hike. The rupee depreciated more than 1% last week, closing at 95.55 per dollar on Friday. Indian markets were closed on Monday for a local holiday. Brent crude oil stayed above $100 per barrel after attacks on ships in West Asia and supply concerns.

Markets anticipate a 25-basis-point Federal Reserve rate hike on Wednesday and expect further tightening signals. Consumer inflation data released on Monday showed CPI at 4.82% in August, supporting arguments for an interest rate hike next month. Factors such as record foreign exchange reserves and portfolio flows related to global equity index rebalancing and local IPOs will also influence the rupee.

The rupee is anticipated to trade between 95 and 95.80. Government bonds may experience further selling after the central bank announced a bond sale of ₹1 lakh crore this fortnight, with the benchmark 10-year bond yield rising for the fourth consecutive week. Traders foresee the yield staying between 6.98% and 7.10%, considering oil prices, the Fed decision, and the response to the first debt sale due on Thursday.

The Reserve Bank of India will utilize its liquidity-draining tool by selling bonds maturing between 2029 and 2032 worth ₹50,000 crore, followed by sales of ₹25,000 crore each on September 21 and September 28. Indian banks have surplus cash after raising $127 billion under the RBI's special forex mobilisation scheme, causing overnight rates to fall below the monetary policy corridor's floor.

Liquidity sterilisation may remain ineffective unless addressed promptly, according to Mansi Sajeja, Fund Manager at SBI Mutual.