The Indian rupee is poised to rise as the U.S. Federal Reserve’s expected September rate cut pressures the dollar. Key market indicators suggest a positive opening for the rupee.
India, Bollywood Fever: The Indian rupee is anticipated to gain ground on Monday, bolstered by U.S. Federal Reserve Chair Jerome Powell’s recent comments, which nearly confirmed a rate cut in September, leading to a further decline in the dollar’s value.
The 1-month non-deliverable forward suggests the rupee will open at 83.80-83.82 to the U.S. dollar, compared to 83.89 in the previous session.
This potential rise comes as the dollar index hovers near its lowest point in over a year. Powell’s remarks at the Fed’s Jackson Hole symposium on Friday, where he stated that “the time had come for policy to adjust,” have reinforced expectations of a rate cut at the Fed’s upcoming meeting.
U.S. equities rallied on Friday, and U.S. Treasury yields fell, with Asian currencies also strengthening, led by the Indonesian rupiah.
Despite the September rate cut being fully priced in before Powell’s speech, the market reaction suggests that some doubted Powell’s commitment to the policy shift.
A currency trader noted, “It means that they were doubters that Powell would pivot, and now that he has confirmed, they have piled in.” For the dollar/rupee exchange rate, the key level to watch on the downside is 83.75.
Debate on Rate Cut Size
The current debate centers on whether the Fed will cut rates by 25 basis points (bps) or 50 bps in September, and whether it will deliver the 100 bps of rate cuts in 2024 that investors have currently priced in.
According to ING Bank, the U.S. jobs report due on September 6 will be crucial in determining the size of the Fed’s rate cut next month.
The Fed is wary of further weakening the U.S. labor market, and a rise in unemployment to 4.4% or 4.5% could trigger a more significant 50 bps rate cut. At present, futures markets are pricing in a 60% probability of a 25 bps rate cut and a 40% chance of a 50 bps cut.
Key Indicators:
- One-month non-deliverable rupee forward: 83.88
- Onshore one-month forward premium: 7 paisa
- Dollar index: Down to 100.62
- Brent crude futures: Up 0.7% at $79.5 per barrel
- Ten-year U.S. note yield: 3.79%
- NSDL data (Aug. 22):
- Foreign investors bought a net $220.6 million worth of Indian shares
- Foreign investors sold a net $222.3 million worth of Indian bonds
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