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Indian rupee, bond markets cautious in week dominated by Fed, tariffs
The deadline to strike trade deals with the U.S. elapses on August 1
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Reuters - Sun, 27, Jul 2025
- 23:43 EDT
- 17
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The Indian Rupee logo is seen inside the Reserve Bank of India (RBI) headquarters in Mumbai, India, December 6, 2024. / REUTERS/Francis Mascarenhas
The Indian rupee and government bonds will react to a host of cues this week, including a U.S. Federal Reserve policy decision and the August 1 reciprocal tariff deadline, which is likely to keep traders cautious.
The rupee closed at 86.5150 against the U.S. dollar on July 25, down 0.4 percent on the week, as foreign portfolio outflows and uncertainty over a U.S.-India trade agreement kept sentiment tepid.
While the Fed is widely expected to keep rates unchanged on July 30, investors will pay close attention to commentary from Fed Chair Powell to gauge the outlook for U.S. policy rates.
"As long as the jobs picture holds up, firmer inflation may well delay the restart of the Fed easing cycle and provide the dollar with a lift this summer," ING said in a note.
Later in the week, data on the U.S. labour market will be in focus alongside an inflation print to gauge how tariffs are affecting the world's largest economy.
ALSO READ: India's economy holding up despite global uncertainties, RBI bulletin says
Meanwhile, the deadline to strike trade deals with the U.S. elapses on August 1. Over the weekend, the United States and the European Union announced a deal, which will result in a 15 percent tariff on EU goods, half what Trump had threatened to impose from August 1.
Japan and the European Union have reached agreements with U.S., alongside others such as Indonesia and Vietnam, even as India's negotiations have appeared to run into roadblocks over key sectors such as dairy and agriculture.
Traders reckon that the rupee will continue to hold a slightly bearish bias and hover in a 86.30-87 range in the near term.
Heightened risk of "news-led price action" should prompt speculators to keep positions small with tight stop-losses, a trader at a foreign bank said.
Meanwhile, India's 10-year benchmark 6.33 percent 2035 bond yield, which settled last week at 6.3505 percent , is expected to move in a range of 6.31 percent to 6.38 percent
Apart from the Fed guidance, focus will also remain on expectations about any potential rate cut in the RBI's upcoming policy decision, due on August 6.
A plunge in India's retail inflation to a more-than-six-year low in June, along with expectations that it will slip to a record low in July, has led to increased talks of a rate cut, with some even expecting action next week.
The central bank slashed its key interest rate by a steeper-than-expected 50 bps last month and changed its policy stance to "neutral" from "accommodative", which had fueled speculation that the rate cut cycle may be over.
Banks will also gauge the liquidity situation and movement in overnight rates after a volatile last week, which saw rates rising beyond the Marginal Standing Facility rate.
Foreign investors have been on the buying side, with net purchases of over 100 billion rupees in the last five weeks, as bets of at least one more rate cut have risen.
India's fundamental story remains intact. Inflation is under control and fiscal health is in check, and India is one of the large benchmark weights within the JPMorgan emerging market debt index, said Jean‑Charles Sambor, head of emerging markets debt at TT International Asset Management.
"We think that fundamentals will remain very attractive for foreign investors."
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