What’s going on here?
The Indian rupee faced hurdles against a stronger US dollar after the Federal Reserve’s surprise 50-basis-point rate cut left markets reeling.
What does this mean?
Economists, per a Reuters poll, expected just a 25-basis-point cut, so the Fed’s decision doubled the shock. The dollar’s strength pushed the 1-month dollar/rupee non-deliverable forward rate down to 83.66 immediately following the cut, though it didn’t maintain that level for long. Compounding the rupee’s challenges, Federal Reserve Chair Jerome Powell dismissed recession worries, bolstering US Treasury yields and further supporting the dollar. The Fed’s dot plot also signaled fewer rate cuts in 2024 than swaps had priced in, with the longer-run Fed funds rate projection now at 2.875%. The market might have already priced in substantial rate cuts, as MUFG Bank noted.
Why should I care?
For markets: Rupee under pressure.
With Asian currencies dipping by 0.1% to 0.5%, the dollar/rupee pair is expected to stay supported near its current level due to regional currency weaknesses. Key figures also show the one-month non-deliverable rupee forward at 83.82 and onshore one-month forward premium at 10 paise. Despite Brent crude futures edging down 0.2% to $73.5 per barrel, and the ten-year US Treasury note yield up at 3.73%, market dynamics indicate some resilience for the rupee.
The bigger picture: Economic currents shift.
The Fed’s surprising move underscores the ongoing volatility in global monetary policy and its ripple effects on emerging markets like India. The strengthened dollar could impact trade dynamics and capital flows, with emerging markets needing to navigate carefully. India’s financial markets might adjust with the forex and money markets reopening and are expected to open largely unchanged to marginally higher from the previous close. Additionally, foreign investors’ recent net acquisitions of $363 million in Indian shares and $10.3 million in Indian bonds show continued interest in India’s growth story despite currency pressures.
