Indian markets weigh rupee gains and bond outlook as inflation data nears

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Indian rupee and bond outlook

Highlights

The rupee gained 1.1% last week to 93.9050 per dollar, outperforming regional peers as investor flows shift from AI-affected Asian markets.
Brent crude fell nearly $20 a barrel, its steepest drop in 6.5 years, easing pressures on India's external balances and boosting market sentiment.
Market expects India's 10-year bond yield between 7.11% and 7.25% as inflation nears 5.93% and rupee appreciation offers RBI more policy flexibility.

Currency and bond drivers this week

As reported by Reuters, the rupee's direction this week hinges on whether the global selloff in AI-linked assets persists, with oil prices and foreign portfolio flows also shaping sentiment. The currency rose 0.6% on Friday to 93.9050 per dollar, its strongest level in more than six months, taking its weekly gain to 1.1%.

A reassessment of AI investments has unsettled global markets and weighed on technology-heavy Asian currencies such as the Korean won and Taiwan dollar. India has benefited from investor flows moving away from those markets, helping the rupee outperform most regional peers last week.

Dhaval Shah, founder and managing director of De-Risk Forex Consultancy, said the outcome of the U.S. midterm elections has improved global investors' perception of Indian equities, which is also supporting the rupee. He added that lower oil prices and easing concerns over further tariff escalation are likely to provide additional support to the currency, with USD/INR potentially extending its decline toward around 92.80 in the near term.

Oil, inflation and yield expectations

Oil prices remain central for both currency and bond markets after Brent crude plunged nearly $20 a barrel last week, its biggest weekly drop in 6-1/2 years. For India, one of the world's largest crude importers, cheaper oil eases pressure on external balances and improves overall market sentiment.

Indian government bonds could build on last week's gains as traders focus on domestic inflation data and the path of crude prices. Market participants expect the benchmark 10-year yield to trade between 7.11% and 7.25%, after it fell 22 basis points last week to 7.1898%, its second straight weekly decline.

India's consumer inflation likely rose to 5.93% in October from 5.54% in September, according to a Reuters poll, putting it near the upper end of the RBI's 2% to 6% target band as food prices climbed. Abhishek Upadhyay, co-head of research at ICICI Securities Primary Dealership, said stronger conviction on lower crude prices and a pickup in foreign inflows amid a reversal in the global AI theme are major sentiment boosters for India.

He said that if these tailwinds persist, the rupee could significantly outperform, with implications for monetary policy and bond markets. Rupee appreciation could give the RBI more room to manage the pace of rate hikes, while the 10-year yield range may have shifted lower to 7.00% to 7.30%.

Our earlier article on the RBI’s rupee defence explained how the central bank deployed an estimated $75–$80 billion from its special FX measures via spot intervention and dollar-rupee swaps, contributing to a drawdown in reserves. We noted that the rupee was under strain from elevated oil prices, higher U.S. Treasury yields and persistent foreign equity outflows, prompting additional steps to curb dollar demand, including a special dollar window for oil companies.

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