Indian rupee, bonds vulnerable to oil pangs on waning Iran diplomacy hopes

By Dharamraj Dhutia and Jaspreet Kalra

MUMBAI, Sept 28 (Reuters) - Indian rupee and government bonds are expected to remain vulnerable through a holiday-shortened week, with oil prices elevated, global bond yields at multi-year highs and rising bets on a Reserve Bank of India rate hike next week.

The rupee closed Friday at 95.8150 per dollar, little changed week on week.

Over the weekend, US President Donald Trump said he had rejected an Iranian proposal to reopen the Strait of Hormuz and end fighting in the Middle East. Iran, meanwhile, insisted that only diplomacy can solve its conflict with the United States

Investors will also watch key US economic data due this week, including the September non-farm payrolls report and personal consumption expenditure inflation data for August.

These data points, along with remarks from Federal Reserve policymakers, are expected to influence market positioning for further US rate hikes.

"A softer payroll print could pull US yields lower and provide some reprieve for several regional currencies, while continued US labor-market resilience and sticky price pressures would reinforce higher-for-longer US rates and keep the USD supported," MUFG said in a note.

Traders expect RBI interventions, which helped keep the currency hemmed between 95.50 and 96 last week amid global headwinds, to continue.

Data released on Friday showed that India's FX reserves declined nearly $15 billion in the week ended September 15, to $765.9 billion.

BONDS

Indian government bonds will likely face more selling pressure in the last week of the fiscal year's first half as bets on a hawkish RBI grow, while traders expect the central bank to continue draining surplus liquidity from the banking system.

Traders expect the benchmark yield to move into the 7.05% to 7.15% range, with focus also on US yields and oil prices.

The benchmark 10-year bond yield posted a sixth consecutive weekly rise after ending Friday five basis points higher for the week at 7.1194%. In six weeks starting August 17, it added 36 bps - the longest rising streak in over a year.

The RBI has already sold bonds worth 750 billion rupees ($7.83 billion), and will sell 250 billion rupees of securities on Monday.

Deutsche Bank expects liquidity withdrawal to continue through foreign-exchange intervention and said further debt sales and sell/buy swaps remain possible, while a 50-basis-point increase in the cash reserve ratio cannot be ruled out.

CRR is the percentage of banks' deposits they are mandated to maintain with the RBI, and it currently stands at 3%.

India's banking system liquidity surplus jumped to a record after a much larger-than-expected $133 billion inflow under the RBI's special forex mobilisation scheme.

"Going forward, market focus is likely to remain on the absorption of the weekly supply, RBI liquidity operations, the October MPC outcome, crude oil prices and global bond yields," Nuvama said in a note.

KEY FACTORS:

India

** August industrial output – September 28, Monday (4:00 p.m. IST)

** August fiscal deficit data - September 30, Wednesday (3:30 p.m. IST)

** September HSBC manufacturing PMI – October 1, Thursday (10:30 a.m. IST)

U.S.

** September consumer confidence - September 29, Tuesday (7:30 p.m. IST)

** August personal consumption expenditure, core PCE - September 30, Wednesday (6:00 p.m. IST)

** April-June GDP growth final - September 30, Wednesday (6:00 p.m. IST)

** Initial weekly jobless claims for the week to September 26 - October 1, Thursday (6:00 p.m. IST)

** September S&P Global manufacturing PMI final - October 1, Thursday (6:00 p.m. IST)

** September ISM manufacturing PMI - October 1, Thursday (6:00 p.m. IST)

** September non-farm payroll and unemployment rate – October 2, Friday (6:00 p.m. IST)

** August factory orders - October 2, Friday (7:30 p.m. IST)