Rupee faces heat after Jerome Powell cools December rate cut prospects, US yields climb
The Indian rupee is poised to weaken at open on Thursday, bogged down by the rise in U.S. Treasury yields and the dollar after Federal Reserve Chair Jerome Powell signalled that a December rate cut isn’t a done deal.
The 1-month non-deliverable forward indicated the rupee will open in the 88.32 to 88.36 range versus the U.S. dollar, after settling at 88.1950 in the previous session.
The 10-year U.S. yield rose 8 basis points on Thursday, while the 2-year climbed 10 basis points. Much of the selloff in Treasuries came after Powell said a rate cut at the December meeting is not a foregone conclusion.
A dissent from Kansas City Fed President Jeffrey Schmid in favour of holding rates steady was considered a hawkish surprise by analysts, compounding the selloff in Treasuries.
Following Powell's remarks, investors pared bets on a December rate cut, with the implied probability dropping from over 90% to about two-thirds.
The dollar index rose 0.4%, reclaiming the 99 handle. Asian currencies were broadly lower.
Despite Powell's pushback, economists held on to their forecast of a cut in December.
ING Bank said it is still expecting a cut in December and two more in 2026, noting that the inflation backdrop is looking less threatening while the jobs outlook is more concerning.
Goldman Sachs said in a note that despite a more hawkish message, a December cut still looks likely, pointing out that the labour market data are unlikely to send "a convincingly reassuring message" by the December meeting.
The Fed's relatively hawkish tone adds to pressure on the rupee, which has already been struggling amid persistent dollar demand from importers and non deliverable forward-related expiries.
The currency has repeatedly relied on support from the Reserve Bank of India, with traders citing the central bank’s presence through state-run banks to prevent a drop past 88.40-88.50.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 88.46; onshore one-month forward premium at 12.75 paise
** Dollar index at 99.02
** Brent crude futures down 0.5% at $64.6 per barrel
** Ten-year U.S. note yield at 4.07%** As per NSDL data, foreign investors bought a net $1,068.1 million worth of Indian shares on Oct. 28
** NSDL data shows foreign investors sold a net $13.5 million worth of Indian bonds on Oct. 28
