Indian Rupee Likely to Weaken as US Rate Hike Bets Strengthen
The Indian rupee is likely to remain under pressure this week as rising oil prices and growing expectations of a US Federal Reserve rate hike add to the currency’s headwinds. Government bonds, meanwhile, could face further selling if stronger economic growth fuels concerns over interest rates.
The rupee gained 0.2% last week to close at 95.3775 per US dollar. However, it remained within a narrow range of around 30 paise, extending a pattern seen over the previous two weeks.
Regular intervention by the Reserve Bank of India has made traders cautious about aggressively betting on further rupee weakness. At the same time, demand from importers looking to hedge future dollar payments has limited gains.
“The rupee’s broader path is towards further weakness. For now, however, I expect largely rangebound trading until the RBI relents,” said Kunal Kurani, vice president at Mecklai Financial.
The currency enters the new week against a more challenging global backdrop, with markets reassessing the possibility of a Federal Reserve rate hike as early as September.
US Fed Chair Kevin Warsh said on Friday that the central bank could need to raise interest rates if inflation remains above its target. His comments increased expectations of a hike at the Fed’s September 15-16 policy meeting.
Investors will now closely track incoming US economic data ahead of the meeting. This week’s key releases include the ISM manufacturing survey, ADP employment report, ISM services survey and, finally, the August jobs report on Friday.
Higher crude oil prices are another concern for the rupee. Brent crude has climbed back towards the $90-a-barrel level, increasing pressure on India’s import bill and the currency.
Bonds May Face Further Selling
Indian government bonds are also expected to trade with a negative bias this week after the benchmark 10-year bond yield climbed to a more than two-month high.
The 10-year yield ended at 6.9108% on Friday, rising 6 basis points after gaining 9 basis points in the previous week.
Traders expect the benchmark yield to move within the 6.85%-6.98% range this week. Market attention will be firmly on India’s April-June GDP data, due Monday evening, which could provide fresh clues about the strength of economic growth and the outlook for interest rates.
