Portfolio outflows likely to pressure rupee, bonds; spillover of Greenland dispute eyed

Portfolio outflows are likely to pressure the Indian rupee and government bonds this week, leaving the currency vulnerable to fresh lows and debt markets under strain, with the focus on debt supply.

The rupee closed at 90.8650 per dollar on Friday (16 January), down 0.7% week-on-week and inching closer to its all-time low of 91.0750 hit in December.

The currency has remained under pressure since steep US tariffs on Indian goods went into effect last year and investors reckon a turnaround in fortunes is unlikely in the absence of a breakthrough in negotiations between New Delhi and Washington.

"The single most important issue remains a comprehensive and balanced trade deal with the United States, probably at least partly dependent on an easing of the personal tensions between Indian PM Modi and US President Donald Trump," said Carl Vermassen, a portfolio manager in the emerging markets debt team at Zurich-based Vontobel Asset Management.

The trade limbo has also dulled the sheen of local stocks for foreign investors who have pulled out about $2 billion from local stocks over January so far, contributing to pressure on the rupee.

The dollar index, meanwhile, logged its third consecutive weekly gain on Friday, bolstered by fading odds of imminent rate cuts by the US Federal Reserve. While the data calendar is relatively light this week, the focus will be on US personal spending and GDP data.

Meanwhile, rupee traders will be assessing the fallout of the Greenland dispute on the dollar, US yields and risk appetitive. US President Donald Trump vowed to slap tariffs on eight European nations until the US is allowed to buy Greenland.

Bonds

The 10-year benchmark 6.48% 2035 yield settled at 6.6767% on Friday, up for a third consecutive week on supply worries and missing the bus for a global index inclusion.

Traders expect the yield to move in a 6.63%–6.72% range, with continued attention on the overall demand-supply scenario as well as the central bank's liquidity action.

Last Tuesday, Bloomberg Index Services deferred the inclusion of local bonds to its flagship Global Aggregate Index, which left market participants dejected as they were counting on foreign inflows amid worries over excess supply and elevated yields.

Vermassen, who expects inflows of $20 billion from the Bloomberg index inclusion, said it would not be a game-changer, with the impact being somewhat smaller, in relative terms, than the earlier inclusion in JPMorgan index.

Heavy weekly borrowing from the centre and states continues, with aggregate gross supply of 8 trillion rupees this quarter. This has pressured yields, leading to the spread widening between federal and state government debt.

"We expect spread to increase further given higher state debt supply and lower demand from market participants. We do not see any significant impact on central government bond yields," said Srinivas Rao Ravuri, chief investment officer at Bajaj Life Insurance.