Key points:
The Indian rupee faces renewed pressure this week, with traders expecting it to stay near its record low against the U.S. dollar. The rupee closed last week at 83.7275, its weakest level ever, and non-deliverable forwards suggest it will open around 83.71-83.72 per dollar on Monday.
See: Indian rupee trading at 83.788 on the VT Markets app.
Month-end dollar demand is a significant factor contributing to the rupee’s decline. However, the Reserve Bank of India (RBI) is likely to intervene to prevent any sharp drops. Traders expect the rupee’s decline to be gradual, with intra-day movements staying muted. State-run banks are expected to offer support, keeping the USD/INR pair within the range of 83.75-83.80.
The broader market context also plays a role. The dollar index (DXY) decreased by 0.1% to 104.2 following data that U.S. prices rose as expected in June. This trend has supported most Asian currencies, with the Thai baht rising by 0.8%.
U.S. bond yields also fell, with the 10-year yield down by 3 basis points to 4.17%. This week, the primary focus will be on central bank policy decisions, especially the Federal Reserve’s meeting on Wednesday. While the Fed is expected to keep rates unchanged, any hints from Chair Jerome Powell regarding future rate cuts could impact market sentiment significantly.
The one-month non-deliverable rupee forward is at 83.78, indicating that the market expects the rupee to hover near its current levels. Onshore one-month forward premium stands at 6.75 paisa, reflecting the cost of hedging for investors.
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The dollar index, which measures the value of the U.S. dollar against a basket of foreign currencies, is down by 0.1% at 104.14. This decline in the dollar index suggests that the U.S. currency is slightly weaker, which could provide some relief to the rupee.
Also read: US dollar index loses strength as Fed rate-cut expectations grow
Brent crude futures have risen by 0.2% to $81.3 per barrel. Higher crude prices typically put pressure on the rupee because India imports most of its oil, leading to increased dollar demand.
The yield on the ten-year U.S. note has decreased to 4.17%. Lower U.S. bond yields can lead to reduced foreign investment outflows from emerging markets, including India, potentially supporting the rupee.
Foreign investors sold a net $262.6 million worth of Indian shares on July 25. This outflow indicates reduced confidence in the Indian equity market, which can negatively impact the rupee. Conversely, the same data shows that foreign investors bought a net $164.2 million worth of Indian bonds on July 25, which could help support the rupee by increasing capital inflows.
Given these dynamics, the rupee is expected to experience a cautious decline, with central bank support likely to prevent any steep falls. Monitoring the Federal Reserve’s policy decisions will be crucial for gauging the rupee’s future trajectory.
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