Indian rupee and bond markets face uncertainties amid global shifts

The Indian rupee rose this week amid a marginal 5 basis points drop in bond yields after Bloomberg Index Services announced the inclusion of Indian bonds in its emerging market local currency index from September.

However, the journey for the rupee and bond markets holds numerous challenges, ranging from the US Federal Reserve's rate cut trajectory to the Reserve Bank of India's (RBI) alignment with the Fed, and the upcoming Union Budget (vote on account) in India scheduled for February 1.

In a conversation with CNBC-TV18, B Prasanna, Head of the Global Markets Group at ICICI Bank, discussed the intricacies of rate cuts, along with insights into the bond and rupee markets.

Prasanna highlighted a significant difference between market expectations and the US Fed's stance on the rate cuts anticipated in the first year of the cutting cycle. While the Fed suggests around 75 basis points, the market leans towards 140 basis points, creating a substantial gap.

| India bonds may be included in Bloomberg EM index from September: Statement

Prasanna mentioned that ICICI Bank is forecasting a more moderate rate cut of 100 basis points, possibly reaching 125, contrary to the higher expectations of 140 to 150 basis points from some market participants.

Prasanna expects the dollar to weaken due to declining US yields. However, the favourable growth differential between the US and the rest of the globe may limit the weakness.

For the rupee, Prasanna highlighted the RBI's effective management of volatility, anticipating a movement to the level of 82/$ in the near term.

For more details, watch the accompanying video