Indian rupee firms as dollar slips on recession fears; yields lowest since May

·2-min read
A man counts Indian currency notes inside a shop in Mumbai

By Anushka Trivedi

MUMBAI (Reuters) -The Indian rupee closed higher on Monday, boosted by equity inflows and the struggle of the dollar amid expectations the Federal Reserve will not deliver large rate hikes, while the local bond yield hit a nearly three-month low.

The partially convertible rupee ended at 79.02 against the dollar, its highest since July 7 and up from Friday's close of 79.25. The rupee has gained more than 1 percent in the past three trading sessions.

"The Fed sounded dovish on the policy day (Wednesday) so the rupee started to gain from there itself," said Anil Bhansali, head of treasury, Finrex Treasury Advisors, adding that equity inflows were one of the major boosts to the market on Monday.

Worrying data from China and Japan weighed on risk sentiment across Asian equities, but Indian shares defied the mood by climbing 1% on the back of a rally in auto stocks owing to robust monthly sales data.

Indian equities have been on a decent run as foreign investors returned to the markets in July, buying $618.05 million worth of shares to mark the first monthly inflow of funds since September 2021, according to Refinitiv data.

However, India's benchmark bond prices have also risen sharply, mostly tracking their counterparts in the United States. The U.S. economy marking a surprise contraction last week made matters worse for debt markets that were already spooked by a yield curve inversion.

On the day, the yield on India's 10-year bond fell to 7.2402%, its lowest since May 12. The yield closed at 7.3196% on Friday after declining by 9 basis points through the week.

The dour U.S. GDP data has raised concerns about a possible recession in the world's biggest economy and prompted investors to reassess their expectations about the pace of rate hikes by the Fed, leading to readjustments in dollar positions.

With a weakening greenback, the Reserve Bank of India (RBI) could step in and buy dollars to replenish its forex reserves, Bhansali said.

Market participants will be on the lookout for more action from the RBI when it announces its monetary policy decision on Friday, with a rate hike of between 35 and 50 basis points expected.

(Reporting by Anushka Trivedi; Editing by Mark Heinrich and David Holmes)

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