What’s going on here?
The Indian rupee is expected to rise slightly on Monday due to hopes that the US Federal Reserve might ease policy rates in September, though a weak Chinese yuan could limit gains.
What does this mean?
Non-deliverable forwards (NDF) suggest that the rupee (INR) will open flat or slightly higher against the US dollar (USD), following its previous session’s close at 83.4850. Market sentiment is cautiously optimistic, with one private bank’s foreign exchange trader predicting the rupee to trend sideways around 83.45 with a slight positive bias. This outlook comes as US economic data shows a mixed bag: nonfarm payrolls increased by 206,000 jobs in June, but the unemployment rate also rose to 4.1% and annual wage growth slowed to its lowest pace in three years. These figures have pushed the probability of a September rate cut by the Federal Reserve to more than 75%, buoying hopes for the rupee despite the offshore Chinese yuan slipping to 7.29.
Why should I care?
For markets: Fed moves could tilt the scales.
A potential rate cut from the US Federal Reserve has significant implications for emerging markets like India. Lower US rates can lead to increased capital flows into higher-yielding emerging market assets, boosting currencies like the rupee. With foreign investors purchasing a net $660.1 million worth of Indian shares and a net $231.4 million worth of Indian bonds on July 4, sentiment seems to be leaning positive. However, the overall market mood remains cautious as a weak Chinese yuan and mixed economic data could temper gains.
The bigger picture: Balancing act on the global stage.
While the prospect of a US rate cut lifts hopes for the rupee, broader global economic dynamics are in play. The dollar index remains robust at 104.91, Brent crude futures hover around $86.4 per barrel, and the ten-year US Treasury yield sits at 4.3%. Both India and the US are set to release their consumer inflation readings this week, which could further influence market movements. Federal Reserve Chair Jerome Powell’s testimony to US lawmakers will also be crucial, potentially clarifying whether a September rate cut is on the cards based on the latest economic metrics.
