Indian Rupee Set to Weaken as Fed Chair's Comments Boost Dollar

The Indian rupee is anticipated to open slightly weaker against the US dollar on October 1, 2024, following comments from Federal Reserve Chair Jerome Powell. Powell's remarks have pushed back expectations of larger interest rate cuts, subsequently strengthening the US dollar.

According to 1-month non-deliverable forward contracts, the rupee is projected to open at 83.80-83.81 to the US dollar, compared to 83.7925 in the previous session. This shift comes as the dollar index and US bond yields rose in response to Powell's statement that the Fed was not "in a hurry" to cut rates, citing recent data that bolstered confidence in ongoing economic growth.

The Federal Reserve's stance has impacted currency markets globally. The CME FedWatch Tool indicates that the probability of a 50-basis-point rate reduction in November 2024 has decreased to approximately 39% from 53% a day earlier. This shift in expectations has led to a broader weakening of Asian currencies, with the Malaysian ringgit experiencing the most significant decline of 0.8%.

A foreign exchange trader at a private bank noted that elevated dollar demand, partly due to equity-related outflows, could maintain pressure on the rupee. However, the currency is expected to find support around the 83.90 level, as exporters may find it attractive to sell dollars at this point.

India's benchmark equity indexes, the BSE Sensex and Nifty 50, experienced their steepest single-day drop in two months on September 30, 2024. Overseas investors net sold stocks worth $1.1 billion, according to provisional exchange data. This significant outflow has contributed to the rupee's vulnerability.

Despite these short-term pressures, analysts maintain a cautiously optimistic outlook for emerging market currencies, including the rupee. DBS Bank stated in a note, "Our FX Strategist expects the broader dollar index to test crucial support levels in the quarter ahead, which might see the INR gain ground but still lag the recovery in Asian peers."

Key indicators influencing the rupee's performance include:
- One-month non-deliverable rupee forward at 83.92
- Onshore one-month forward premium at 12.25 paisa
- Dollar index at 100.76
- Brent crude futures up 0.2% at $71.8 per barrel
- Ten-year US note yield at 3.78%

Foreign investment data from NSDL shows that international investors purchased a net $43.5 million worth of Indian shares and $50.4 million worth of Indian bonds on September 29, 2024. These figures, while positive, may not be sufficient to offset the broader market trends affecting the rupee.

As the world's fifth-largest economy by nominal GDP, India's currency movements are closely watched by global investors. The Reserve Bank of India, responsible for managing the rupee and monetary policy, will likely monitor these developments closely to maintain economic stability.

The rupee's performance in the coming days will be influenced by a complex interplay of domestic and international factors, including global oil prices, foreign investment flows, and the overall strength of the US dollar. Market participants will be keenly observing how these elements unfold to gauge the rupee's trajectory in the near term.