Pressure on rupee to linger after Fed signals no hurry to cut rates
The Indian rupee is likely to stay on the defensive on Thursday, after the U.S. Federal Reserve expectedly kept interest rates unchanged and Chair Jerome Powell said there would be no rush to cut them again.
The 1-month non-deliverable forward indicated that the rupee will open around 86.57-86.58 to the U.S. dollar, marginally weaker than Wednesday's 86.54.
The dollar index climbed a near one-week high following the Fed's decision before paring gains to trade flat at 107.8 in Asia trading.
Referring to the potential impact of policy changes by U.S. President Donald Trump, Powell said that Fed officials are "waiting to see what policies are enacted" before judging the effects on inflation, employment and overall economic activity.
Analysts have said that Trump's policies surrounding import tariffs, an immigration crackdown, tax cuts and looser regulation may add to inflationary pressures in the U.S. economy, prompting the Fed to keep rates higher for longer.
In the near-term, investors will also keep an eye on whether Trump follows through on his pledge to impose 25% tariffs on Mexico and Canada from Saturday.
"Tariffs and not rate differentials are the major FX driver now. But a slightly hawkish Fed can only help a market currently positioned overweight the dollar," ING Bank said in a note.
Meanwhile, persistent portfolio outflows are also expected to keep the rupee under pressure, with foreign investors pulling out nearly $9 billion from local stocks and bonds in January so far.
Traders reckon the Reserve Bank of India's market interventions should keep a lid on the rupee's volatility.
State-run banks, likely on behalf of the RBI, "have been active near 86.60 and that is likely to continue," a trader at a state-run bank said. The rupee has weakened over 1% in January so far and is the worst performer among major Asian currencies.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 86.75; onshore one-month forward premium at 17 paise
** Dollar index at 107.83
** Brent crude futures up 0% at $76.6 per barrel
** Ten-year U.S. note yield at 4.53%
** As per NSDL data, foreign investors sold a net $339.8mln worth of Indian shares on Jan. 28
** NSDL data shows foreign investors bought a net $113.9mln worth of Indian bonds on Jan. 28
