Government Bond and Market Reactions
The benchmark government bond yield in India decreased by 9 basis points to 7.04%, following news of a potential framework proposal between the US and Iran to resolve their conflict. This news improved market sentiment and reduced crude oil prices. Despite this, Tehran later sought a lasting end to hostilities and resisted reopening the Strait of Hormuz under a temporary ceasefire.
Impact on the Rupee
- The rupee initially strengthened against the dollar, moving below the 93 mark intraday, but lost most gains by the end of trading.
- Factors such as improved risk appetite, lower crude prices, and dollar sales by banks supported the rupee.
- The currency touched a high of 92.79 per dollar before closing at 93.06, only a slight change from 93.10 previously.
- Regulatory measures, including restrictions on net open positions and non-deliverable derivatives, helped the rupee rebound by 1.9% after weakening more than 4% in March.
Macroeconomic and Policy Outlook
Standard Chartered revised its macroeconomic outlook, lowering India's GDP growth forecast for FY27 to 6.4% from 7%, citing elevated energy prices and potential supply disruptions as risks. The bank expects inflation to remain within the 2-6% target band but acknowledges a possible repo rate increase of 25-50 basis points if energy prices rise. The Reserve Bank of India (RBI) is expected to keep the policy rate unchanged at 5.25% with a neutral stance.
Geopolitical and Market Dynamics
- US President Donald Trump's warning to Iran about the Strait of Hormuz and Tehran's conditions for a ceasefire added uncertainty to negotiations.
- Brent crude eased slightly to $107 per barrel, and the dollar index slipped to 99.85 from 100.13.
- Thin liquidity in the forward market increased rupee volatility, with forward premiums rising sharply due to liquidity constraints and potential RBI rate hikes.
Forward Market Activity
- Forward premiums surged, attributed to liquidity concerns and hedging demand.
- The one-month USD/INR forward premium rose to 6.08% from 5.4%.
- Market activity is driven by flows rather than macroeconomic fundamentals, a trend expected to continue as the market adjusts to the central bank's measures.
