Global Markets Rebound, India Eyes Rate Hike as Rupee Strengthens

Global markets saw a mixed reaction to recent market interventions, with some key levels returning to pre-intervention states. The Dollar Index initially fell but later rose, driven by Japanese Yen underperformance. The US Treasury's announcement of a buyback operation led to a rise in longer-end yields, reaching 4.7% for the 10-year and 5.24% for the 30-year.

The S&P500 index fell 0.9%, with risk assets experiencing a corresponding hit. MUFG Research notes that this is not surprising, given that intervention alone cannot change market trends without underlying macro shifts. The research team points to fiscal trajectories as a major contributor to US market woes.

Looking ahead to Asia, MUFG Research predicts a potential increase in Indian rupee rates. They cite the RBI's hawkish August MPC minutes and the early closure of the FCNR(B) facility as key indicators. With domestic growth remaining robust and credit growth accelerating, the RBI is expected to hike rates by 50bps starting in December.

While the external buffer should remain supportive of the INR, liquidity management suggests that the RBI will prioritize orderly currency movements over appreciation.