Rupee, Bonds Weaken as Oil Prices Rise and RBI Rate Hike Looms

The Indian rupee and government bonds are under pressure due to high oil prices, multiyear highs in global bond yields, and expectations of a Reserve Bank of India interest rate hike.

Last week, central bank intervention kept the exchange rate within a range of 95.50-96 rupees per dollar despite external pressure. The rupee closed at 95.8150 per U.S. dollar on Friday, little changed for the week.

The Reserve Bank of India plans to offer another 250 billion rupees' worth of securities for sale on Monday, following last week's sales of 750 billion rupees. Deutsche Bank estimates that liquidity withdrawal could continue through foreign-exchange interventions and further sales of debt securities and currency swaps involving simultaneous currency purchases and sales.

The central bank has already drained excess liquidity from the banking system by selling bonds worth $7.83 billion. Traders expect the Reserve Bank of India to raise interest rates next week, which could put more pressure on the rupee and government bonds.