MUMBAI, March 9 (Reuters) - The Indian rupee and government bonds are likely to remain under pressure this week, as the deepening Middle East conflict and a nearly 25% spike in oil price cloud the outlook for growth and inflation, keeping investors risk-averse.
The U.S.-Israeli campaign against Iran has entered its second week, with the war rattling businesses worldwide and driving up energy prices.
Brent crude futures jumped on Monday to their highest level since July 2022, driven by supply cuts from major Middle Eastern oil producers and concerns over prolonged shipping disruptions through the Strait of Hormuz due to the escalating conflict.
Iraq and Kuwait have started reducing oil production, adding to earlier liquefied natural gas reductions from Qatar, as the war blocked shipments from the Middle East. Analysts predict the United Arab Emirates and Saudi Arabia may soon need to cut output as their oil storage reaches capacity.
Meanwhile, Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as Supreme Leader on Monday, signalling that hardliners remain firmly in charge in Tehran.
India is one of the largest importers of oil, and rising oil prices affect the nation's inflation and current account deficit. Brent prices nearly hit $95 per barrel on Friday and have gained more than 25% so far this month.
The rupee hit a record low last week, prompting the Reserve Bank of India to intervene and help the currency recover north of the 92-per-dollar mark even as it logged its steepest weekly fall in a month.
If oil prices continue to rise, however, the rupee could fall towards the 92.50 mark, traders reckon, sparking a fresh round of pressure as importers rush in to lock hedges and exporters hesitate.
"Exporters have been holding back as recent hedges are suffering notional losses and they are uncertain how much further the rupee could weaken from here," an FX salesperson at a large U.S.-based bank said.
The rupee, though, has fared better than some of its emerging-market peers, such as the Korean won and Brazilian real.
The relative resilience of the rupee is consistent with the tight central bank management, analysts at Goldman Sachs said in a note. "But the longer this shock persists, the less sustainable these policies would become."
Meanwhile, data released on Friday showed that the U.S. economy unexpectedly shed 92,000 jobs last month, which modestly dented the dollar, which otherwise has been supported by a rush for safe-haven assets.
BONDS
The benchmark 10-year yield ended at 6.6898% on Friday, up 3 basis points for the week, despite heavy purchases by an investor group comprising the RBI, as a war-triggered spike in oil prices eroded investor confidence.
Traders anticipate the yield to move in a 6.65%-6.75% range this week, with the primary driver being the move in oil prices.
The RBI will purchase bonds worth 1 trillion rupees ($10.88 billion) this week, in two tranches of 500 billion rupees each on Monday and Friday.
The "Others" category of investors, which comprises marquee participants such as insurance companies, pension funds, and corporates, net bought bonds worth 581 billion rupees in the week ended March 6, the biggest ever buying.
Traders estimate that at least half of this buying would be from the central bank.
The RBI, with policy buffers, is helping manage volatility in both the rupee and the rates market, said Kanika Pasricha, chief economic adviser at Union Bank of India.
KEY EVENTS:
** India February retail inflation - March 12, Thursday (4:00 p.m. IST) (Reuters poll: 3.1%)
U.S. ** February existing home sales - March 10, Tuesday (7:30 p.m. IST) ** February consumer price inflation - March 11, Wednesday (7:00 p.m. IST) (Reuters poll: 2.4%) ** Initial weekly jobless claims for the week to March 7 - March 12, Thursday (6:00 p.m. IST)
** January housing starts number - March 12, Thursday (6:00 p.m. IST)
** January international trade data - March 12, Thursday (6:00 p.m. IST) ** January durable goods - March 13, Friday (6:00 p.m. IST)
** October-December 2nd GDP advance - March 13, Friday (6:00 p.m. IST)
** January personal consumption expenditure - March 13, Friday (6:00 p.m. IST)(Reuters poll: 2.8%)
** March U-Mich sentiment final - March 13, Friday (7:30 p.m. IST)
($1 = 91.9280 Indian rupees)
Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Harikrishnan Nair, Rashmi Aich and Sherry Jacob-Phillips
Source: Reuters