Strong Macros Likely To Continue Supporting Bond, Rupee Markets Amid Geopolitical Concerns

India's macro fundamentals are likely to continue to lend support to bond, rupee markets despite heightened volatility after India launched precision strikes on nine terrorist bases in Pakistan.

Bond yields remained at 6.3% on Wednesday, largely in line with Tuesday's levels. Outlook remains supportive. "We continue to remain constructive on government bonds and expect the bond market to see through the ongoing geopolitical risks," said Dhawal Dalal, president and chief investment officer – fixed income of Edelweiss Asset Management Ltd. Bond yields are likely to continue to focus on positive macroeconomic landscape, surplus liquidity and central bank actions, he added.

Easing retail inflation, prognosis of a normal monsoon and potential rate cuts are expected to keep yields on the benchmark 10 year G-Sec trending towards 6.20-6.30% range in the near term, according to Dalal.

The rupee opened marginally weaker at 84.63 against the dollar after closing at 84.43 on Tuesday. Ritesh Bhansali, FX trader and deputy CEO at Mecklai Financial, said that going forward, an over reaction on the rupee is unlikely.

India's actions were in line with expectations, Bhansali said, adding that is why markets are relieved. That said, we still can't say that the rupee won't breach 85 against the dollar if there is an escalation through some military intervention, Bhansali said.

Irrespective of India-Pakistan, the rupee will likely remain volatile given global cues and evolving trade deals, he cautioned.

As countries approach closer to bilateral trade deals with the US, EM FX basket (especially the export led economies) appears to be on an appreciation trend, with limited central bank actions to cap the gains, stated a research note by Kotak.

There is an increasing view building up that the authorities will allow local currencies to appreciate against the US Dollar to sweeten the trade deals, the May 7 note stated.

"Against this backdrop, we see scope for aggressive exporter selling, aggravating the appreciation bias of the currencies," it stated, adding that in the absence of FX intervention, INR too could move in sync with the EM basket, with further strengthening possible. Kotak forecasts USDINR to trade in the 83-85 range in the near term.

While financial markets appear to be pricing in a de-escalation, over the medium term, fundamentals will be back in focus given that macroeconomic data from India has been decently strong, said Dhiraj Nim, economist and FX strategist at ANZ.