Indian Rupee At Over 1-wk High On Broad $ Losses; Bond Yields Slip

The Indian rupee rose to its highest in more than a week on Monday afternoon tracking broad losses in the dollar, while bond yields edged down, mirroring the move in their U.S. counterpart ahead of the outcome of the U.S. Federal Reserve meeting.

The U.S. Federal Reserve has signalled a 75 basis point rate hike at its July 26-27 meeting, although data last week showing inflation hit 9.1% year-on-year in June raised the possibility of a larger 100 bps hike later this year.

India's partially convertible rupee ended trading at 79.73 per dollar compared to its close of 79.8550 on Friday. The unit rose to a high of 79.6950 during trade, its strongest since July 13.

"The dollar is weakening against most majors in European trade, that has helped the rupee. But with Fed expected to raise rates this week, we could see pressure building up on the rupee again," the head of trading at a private bank said.

The dollar index, a measure of the greenback's performance against major currencies, was down 0.4%.

Stocks across emerging markets struggled, weighed down by losses in China equities on COVID-19 flare-ups and slowdown fears. Indian shares too, snapped a six-session winning streak to end about 0.5% lower led by losses in Reliance Industries. [.BO]

"There is expectation that the Fed will not hike beyond 75 bps. The expectation of 100 bps has come down to 20% from 80% that we saw at its peak post-inflation data," said Anitha Rangan, an economist with Equirus Group.

A scaling back in market bets on when U.S. rates will peak follows weak business activity data on Friday that has raised the spectre of recession.

Traders said the Reserve Bank of India (RBI) too was likely selling dollars to aid the recovery in the rupee after it touched a life-time low of 80.0650 last week.

"RBI's intervention cannot be ruled out ... The weekly decline in FX reserves is due to RBI intervention, so it is very much possible. It's a combination of both these factors," Rangan added.

The RBI is justified in using the country's foreign exchange reserves to smooth out volatility in the rupee's moves against the dollar, Sanjeev Sanyal, a member of the Prime Minister's Economic Advisory Council said on Monday.

India's benchmark 10-year bond yield ended at 7.39%, compared with its close of 7.41% on Friday.

The U.S. 10-year Treasury note yield ended the week near its lowest since late-May after weak data on Friday added to worries about the global economy and traders reassessed the Federal Reserve's ability to raise rates much further.