Indian Rupee likely extends previous week’s downfall on Tuesday
- The Indian Rupee is expected to open lower against the US Dollar on Tuesday after an extended weekend.
- The Fed is widely anticipated to hike interest rates on Wednesday.
- Fears of a further squeeze in global energy supply have prompted oil prices.
The Indian Rupee is expected to extend its previous week’s plunge against the US Dollar (USD) after a long weekend on Tuesday. Indian financial markets across equity, commodity and currency remains closed on Monday due to Ganesh Chaturthi celebrations.
In the last week, the Indian currency declined significantly against the US Dollar, with the USD/INR pair surging 1.1% to near 95.55.
A significant jump in US Treasury Yields due to a fresh escalation in hawkish Federal Reserve (Fed) expectations, following the release of the hotter-than-projected United States (US) Producer Price Index (PPI) report for August, and continuously rising oil prices led to a sharp depreciation in the Indian Rupee last week.
Higher US bond yields diminish the appeal of risk-sensitive currencies. Also, currencies from economies, such as India, which rely heavily on oil imports to meet their energy needs, tend to underperform in a high-oil-price environment.
What could cause further sell-off in INR on Tuesday
A further increase in both US Treasury Yields and oil prices could accelerate pressure on the Indian Rupee. As of writing, 10-year US Treasury Yields are trade close to its fresh highs of 4.99%, a level seen never since November 2023.
US Treasury Yields have rallied amid fears that the Federal Reserve (Fed) will hike interest rates by 25 basis points (bps) to 3.75%-4.75% at the monetary policy announcement on Wednesday.
Strategists at Brown Brothers Harriman (BBH) expect the FOMC to break its streak of five consecutive holds, noting that “the FOMC is poised to deliver a 25bps hike to a target range of 3.75%-4.00% on Wednesday, marking its first hike since July 2023.” BBH argues that “persistently above target US inflation and a stable labor market justify a rate increase,” and points out that positioning is already heavily skewed toward such an outcome, with “Fed funds futures price in roughly 90% odds of a hike this week.”
Brent extends gains as Middle East supply risks escalate
Analysts at Deutsche Bank highlight that the latest move in Brent comes “following the precautionary shutdown of a major Saudi pipeline late on Friday following recent attacks, and the postponement of today's planned meeting between Iran and other Gulf states to discuss the creation of a temporary shipping corridor through the Strait of Hormuz.” They note that these developments have reinforced market concerns around regional supply security and key shipping routes.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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