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Indian Rupee, Bonds Extend Decline As Traders Await RBI Policy

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Indian rupee and bonds declined, along with most Asian peers, as investors adjusted to a surge in global bond yields. The local currency opened 16 paise lower at 64.22 per dollar. The 10-year bond yield rose to 7.62 percent from its previous close of 7.56 percent.

The rupee remained under pressure after strong U.S. jobs data on Friday speculated that the Federal Reserve may boost interest rates next month. The next U.S. Fed policy meeting will start on March 21.

On Friday, U.S. Labor Department data showed that wages rose in January at the fastest rate since 2009 at 2.9 percent. The non-farm payrolls came in at 2 lakh in January, above the 1.8 lakh expected, and the unemployment rate remained steady near 17-year low of 4.1 percent.

The re-pricing of markets has come as investors question whether the Federal Reserve will keep to a gradual pace of monetary tightening, and whether it may need to end up boosting interest rates by more than previously expected in coming years. A higher so-called terminal rate for the Fed’s target implies higher long-term yields -- raising borrowing costs across the economy.

Domestically, the Reserve Bank of India’s interest rate decision on its Feb. 7 monetary policy review will also be closely watched.

K Harihar, head of treasury at First Rand Bank, expects rupee to trade in the range of 64.25-64.50 a dollar in the near-term if the equity market sentiment worsen further. In the near term, dollar index may see some pressure, he added.

Veracity Group Chief Executive Officer Pramit Brahmbhatt agrees.

"Rupee is expected to remain under pressure on strengthening dollar amid volatile local and global cues. Expect rupee to depreciate to 64.20-64.80 a dollar, if it continues to trade above 63.80 per dollar in the near term." - Pramit Brahmbhatt, CEO, Veracity Group

The Indian bond markets is already under pressure after the government breached its fiscal deficit target for financial year ending March 2017 to 3.5 percent from earlier target of 3.2 percent, and revised upward its target for next year to 3.3 percent from 3 percent earlier. Also, introduction of long-term capital gains tax dampened sentiment.

The volatile swings seen post the Budget are expected to persist till the RBI Monetary Policy Committee review this week, said Ajay Manglunia, co-head, Edelweiss Fixed Income Advisory.

“Although there are no major surprises in the Budget, the bond markets are now awaiting the MPC commentary with regard to the slower pace of fiscal consolidation as well as the outlook on inflation.”

As with the last couple of sessions, the 10-year benchmark bond yield is likely to trade in a wide band of 7.50-7.65 percent today, he added.

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