The Indian rupee under pressure as concerns over additional tightening by the U.S. Federal Reserve mount. The minutes of the Fed’s June meeting, which revealed the expectation of further rate hikes this year, have intensified the pressure on the rupee. Non-deliverable forwards suggest that the rupee will open around 82.30 against the U.S. dollar, slightly weaker compared to the previous session’s level of 82.2250. The rupee breached the crucial support level of 82.20 on Wednesday, and despite briefly touching 81.75 earlier in the week, it has struggled due to dollar buying by public sector banks, possibly on behalf of the Reserve Bank of India, and by oil companies.

Currency traders are closely monitoring the volatility of the rupee, which has experienced notable fluctuations in recent times. A forex trader at a bank acknowledged that, considering the rupee’s historical volatility, the recent movements have been significant. However, there remains uncertainty about how much higher the USD/INR pair can climb, with many market participants expressing doubts about breaching the 82.50 level.

Rupee Under Pressure as Growing Rate Hike Expectations Spark Dollar Buying and Volatility

Following the release of the Fed minutes, the dollar index strengthened, U.S. yields inched higher, and equities retreated. The minutes revealed that although the Fed opted for a pause in the June meeting, some members were open to a 25 basis points increase. Additionally, the majority of participants agreed that further rate hikes would be appropriate later in the year.

ANZ highlighted that the meeting minutes align with their expectations of a 25 basis points hike at the upcoming July meeting. Market sentiment has already factored in a high likelihood of a rate increase in July. Consequently, most Asian currencies experienced declines ranging from 0.2% to 0.4%. The 2-year Treasury yield reached 4.9630% in Asia, hovering near its highest level since March.

In the upcoming sessions, investors will closely monitor U.S. private payrolls data for insights into the labor market, followed by the ISM services print, which will provide further indicators of the economic conditions that could influence the Fed’s decision-making process.

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The rupee faces a challenging path ahead as it navigates the headwinds created by the possibility of additional Fed tightening. Investors and traders will keenly observe global market developments, particularly the strength of the U.S. dollar and shifts in risk sentiment. Any further indications of rate hikes by the Federal Reserve could drive additional dollar buying, further pressuring the rupee.

Key indicators underscore the headwinds faced by the rupee. One-month non-deliverable rupee forwards are at 82.38, while onshore one-month forward premiums stand at 7.5 paisa. The USD/INR NSE July futures settled at 82.34 on Wednesday, accompanied by a forward premium of 6.5 paisa. The dollar index currently stands at 103.32, and Brent crude futures registered a modest increase of 0.2% at $76.8 per barrel. Additionally, the ten-year U.S. note yield presently sits at 3.95%.

Despite the challenges faced by the rupee, foreign investors continue to maintain their interest in the Indian market. NSDL data reveals that on July 4, foreign investors purchased a net worth of $306.9 million in Indian shares, indicating their confidence in the long-term potential of the market.

Additionally, foreign investors bought Indian bonds worth a net value of $6.6 million on the same day. These capital flows demonstrate the continued attraction of global investors to the Indian market, despite the recent struggles of the rupee. It highlights the underlying strength of the Indian economy and its potential for growth, which may provide some support for the rupee in the face of external pressures.

Conclusion

In conclusion, the Indian rupee is facing increased pressure as worries over further tightening by the U.S. Federal Reserve intensifies. The minutes of the Fed’s June meeting, which revealed expectations of more rate hikes, have sparked dollar buying and increased volatility. The rupee is likely to extend its losses against the U.S. dollar, with market participants closely monitoring the currency’s performance.

As the Fed’s rate hike expectations become more pronounced, the rupee faces headwinds and challenges in the coming sessions. Traders and investors will keep a close eye on global market dynamics, risk sentiment, and key economic indicators that could influence the Federal Reserve’s decision-making process. The rupee’s path forward will be shaped by the interplay between these factors and its impact on currency markets.

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