Crude moves to dictate direction for Indian debt, rupee; RBI key for currency

The direction of Indian government bonds and rupee this week will hinge on how the Israel-Iran conflict unfolds and its impact on crude oil prices, while the extent to which the central bank steps in to manage currency volatility will be crucial. Crude prices had soared on Friday following Israel's attack on Iran. On Monday, Brent crude jumped at open before pulling back. Brent, which climbed past $78 at open on Monday, was last at $74.78. The Israel-Iran conflict continues to escalate. Israel and Iran launched fresh attacks on Sunday, killing and wounding civilians. Early on Monday, Israel's air force attacked with surface-to-surface missile sites in central Iran. On Friday, the rupee dropped 0.6%, posting its largest one-day decline in over a month. Bankers said the Reserve Bank of India likely intervened to support the currency. "The RBI, in a way, indicated that it will not tolerate a big move that is purely driven by the unfolding Middle East conflict," said Kunal Kurani, vice president at risk advisory firm Mecklai Financial. "I would expect that intraday ranges will now widen and news headline risk will be high." With India importing the bulk of its crude requirements, any sustained increase in oil prices tends to widen the trade deficit, stoke inflation concerns, and increase demand for dollars from oil marketing companies-all of which are bearish for the rupee. Apart from oil, focus will be on central bank monetary policy meetings, with the Bank of Japan, Federal Reserve, and Bank of England all due to announce their decisions this week. Elevated inflation will impact demand for Indian bonds, as it further reduces the likelihood of additional rate cuts, especially after the RBI delivered an outsized 50 bps cut on June 6. Meanwhile, India's 10-year benchmark 6.33% 2035 bond yield ended at 6.2996%. The 10-year yield rose 6 basis points last week, posting its biggest weekly rise since the week ended December 20. Traders expect the yield to move in a range of 6.27% to 6.35% this week. Bond yields jumped despite the steepest cut in policy rates in five years, as traders chose to focus on the central bank's guidance that the easing cycle is over. The impact of the central bank's change in monetary policy stance and the abrupt stoppage of daily fund infusion hurt investor sentiment, leading to selling across the curve. Since Wednesday, the RBI stopped conducting overnight repos, which it had started in the middle of January. "We also wait to see if the RBI announces any daily VRRR (variable rate reverse repo) operations to prevent TREPS rate from remaining below the SDF rate, particularly as the monetary policy stance has turned neutral now and RBI discontinuing daily VRR auctions," Kaushik Das, Chief India Economist at Deutsche Bank said. KEY EVENTS:

• India May wholesale price inflation - June 16, Monday (12:00 p.m. IST)
• Minutes of Reserve Bank of India's June monetary policy meeting - June 20, Friday (5:00 p.m. IST)
• Bank of England rate decision - June 19, Thursday (Reuters poll: No change expected)
• US May import prices - June 17, Tuesday (6:00 p.m. IST)
• May retail sales - June 17, Tuesday (6:00 p.m. IST)
• May industrial production - June 17, Tuesday (6:45 p.m. IST)
• May housing starts number - June 18, Wednesday (6:00 p.m. IST)
• Initial weekly jobless claims for week ended June 9 - June 18, Wednesday (6:00 p.m. IST)
• Federal Reserve monetary policy decision - June 18, Wednesday (11:30 p.m. IST)(Reuters poll: no change)
• June Philly Fed Business index - June 20, Friday (6:00 p.m. IST)