Trade View: The Week Ahead
Season greetings to you and your family. This is the last trade view for this year, and we will be back with our market views in 2026.
The USD/INR pair gained 1.1% on Friday and closed below 90 at 89.27, supported by likely dollar sales by the RBI. As per market estimates, the RBI is likely to have sold 1.5-2.0 billion dollars in the spot market on Friday. Looking ahead, we expect the pair to trade between 89.50-90.50 in the very near term, as market awaits progress on India-US trade negotiations.
Elsewhere, the BoJ hiked rates by 25 bps to 0.75% on Friday. While the rate hike was in line with market expectations, lack of clarity on future path of rates led to a sell-off in JPY denominated assets. The USD/JPY closed at 157.75 on Friday and stood at 157.43 at the time of writing. Meanwhile in China, the PBoC (People’s Bank of China) left prime lending rate unchanged earlier today.
This week, data releases (Q3 GDP and October PCE) due in the US and Japan (Tokyo CPI) are likely to be on the market’s radar. We expect major FX crosses to trade in a thin range in the coming days on account of low liquidity during the holiday season.
BoJ meeting: As expected, the BoJ raised its policy rate by 25 bps to 0.75% on Friday. However, the rate action was not seen as hawkish by the market as the central bank refrained from offering a clear forward guidance on rates. During the press briefing, while Governor Ueda mentioned there is room for further rate hikes, he did not offer any clarity on the pace and timing of future rate increases. The market is pricing in the next rate hike in Japan in H2 2026, as inflation is estimated to remain below the 2% target during H1.
In the FX market, the JPY fell against all major currencies as the BoJ did not exhibit any sign of urgency for the next rate action. This week, Tokyo CPI report (a bellwether for national CPI) scheduled to be released on Friday is likely to be watched closely. The USD/JPY could come under further pressure if core Tokyo CPI comes below the consensus estimate of 2.5% YoY. We expect the USD/JPY to trade in the range of 156-160 in the very near term and see the possibility of FX intervention by authorities should the pair inch towards 160 levels.
Global Yields: Following a rate hike by the BoJ, global bond yields hardened on Friday. The Japanese 10Y G-sec yield closed ~5 bps higher at 2.02% and the US 10Y moved up 3.5 bps to 4.15%. In the domestic market, the 10Y benchmark closed at 6.60% vs. 6.58% earlier, after the RBI set lower than expected cut-off price at the weekly G-Sec auction. We expect the 10Y benchmark yield to trade in the range of 6.55-6.65% in the very near term.
RBI MPC minutes: The minutes of RBI’s December policy meeting reaffirmed that a benign inflation outlook supported the decision of 25-bps rate cut by the central bank. Furthermore, several MPC members including Governor Sanjay Malhotra found real interest rates to be high and restrictive. Lastly, while DG Poonam Gupta mentioned that benign inflation holds a significant weightage in determining monetary policy, external member Dr Nagesh Kumar highlighted that there are initial signs of a slowdown in growth.
Rupee Forward Premium: The 1Y USD/INR forward premium jumped to a 3Y high of 2.84% on Friday. The move in forward premiums was driven by excess dollar liquidity, year-end positioning adjustments & hedging demand by importers.
Banking Liquidity: As of 18th December, banking sector liquidity was in a deficit of INR 0.30 lakh Cr. Heading into the week, GST related outflows are likely to weigh on liquidity conditions. However, the RBI announced to conduct a 2-day VRR auction worth INR 1 lakh Cr later today which could ease pressure on liquidity conditions.