The Indian rupee closed last Friday at 86.5150 against the U.S. dollar, marking a 0.4% decline for the week. Weakening sentiment was driven by persistent foreign portfolio outflows and lingering uncertainty over a potential U.S.-India trade pact. The currency is now expected to stay in a tight range of 86.30–87 in the coming days, with traders bracing for volatility.
“The risk of sudden news-led price action is elevated,” noted a trader at a foreign bank, who added that participants are likely to maintain light positions with tight stop-loss levels.
U.S. Fed in Focus
Investors are turning their attention to the U.S. Federal Reserve, which is widely expected to hold interest rates steady in its policy announcement on Wednesday. However, more important than the decision itself will be Fed Chair Jerome Powell’s remarks, which could offer clues on the trajectory of interest rates going forward.
According to analysts at ING, a still-resilient U.S. jobs market coupled with sticky inflation may delay the start of a rate-cutting cycle and continue to buoy the U.S. dollar through the summer. This could further pressure the rupee, already weighed down by capital outflows and trade policy uncertainty.
Additional U.S. data releases this week—including labour market statistics and inflation indicators—will further help investors assess the impact of tariffs on the American economy.
Global Trade Tensions Simmer
Another critical catalyst is the August 1 deadline for resolving trade disputes between the U.S. and its global partners. Over the weekend, the United States and the European Union reached a partial agreement, softening proposed tariffs to 15%—half the original threat issued by the Trump administration.
While countries such as Japan, Indonesia, and Vietnam have managed to strike compromises, India's negotiations appear to have hit a snag, particularly over sensitive sectors like dairy and agriculture. The lack of progress on that front adds another layer of uncertainty for currency and bond markets alike.
Bond Markets Watching RBI and Inflation
India’s 10-year benchmark 6.33% 2035 bond yield ended last week at 6.3505%, with traders anticipating a trading band of 6.31% to 6.38% in the near term. Bond investors are closely monitoring the Reserve Bank of India (RBI), which is scheduled to announce its next monetary policy decision on August 6.
Expectations of a rate cut have been reignited following a sharp decline in retail inflation, which fell in June to its lowest level in more than six years. Many economists believe July inflation could set a new record low, creating room for another round of monetary easing.
Last month, the RBI surprised markets by slashing its key interest rate by 50 basis points and shifting its policy stance from “accommodative” to “neutral”—a move that initially suggested the end of the rate cut cycle. However, cooling inflation and global economic fragility may push the central bank to reconsider.
“The fundamentals of the Indian economy remain strong,” said Jean‑Charles Sambor, Head of Emerging Markets Debt at TT International Asset Management. “With inflation under control, stable fiscal metrics, and India’s weight in major EM indices, foreign investors remain attracted to the market.”
Indeed, foreign investors have been net buyers in recent weeks, pouring in over 100 billion rupees, bolstered by growing bets on additional rate cuts and continued macroeconomic stability.
Liquidity and Key Data in View
Banks are also expected to watch overnight rates and liquidity conditions after a turbulent week that saw short-term rates spike above the Marginal Standing Facility (MSF) rate, hinting at temporary funding stress in the system.
Meanwhile, a flurry of economic indicators is scheduled for release over the coming days, which could further sway market dynamics. These include:
- India’s June fiscal deficit and industrial output – July 28
- U.S. July consumer confidence – July 29
- India’s April–June GDP advance estimate – July 30
- Federal Reserve monetary policy decision – July 30
- U.S. jobless claims, PCE index, and employment data – July 31 to August 1
- India’s July manufacturing PMI (HSBC) – August 1
With a convergence of domestic and international developments looming, traders and investors are likely to keep a defensive posture in the week ahead, awaiting clearer signals on the direction of monetary policy, trade agreements, and inflation trends.