Rupee may weaken past 85/USD on Fed`s `decidedly`hawkish turn
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The Indian rupee may dip past 85 for the first time on Thursday after Federal Reserve officials signalled fewer rate cuts in 2025, sending the dollar index to its highest in two years.
The one-month non-deliverable forward indicated that the rupee will open at 85.04-85.06 to the U.S. dollar compared with 84.9525 in the previous session.
Overnight, U.S. equities plunged, Treasury yields rose and the dollar index soared after the Fed indicated a much slower pace of rate cuts than previously forecast.
The median projection of the Fed's Summary of Economic Projections showed two rate cuts in 2025, down from four in September. Powell, in his post-policy press conference, reinforced the message that the central bank will be cautious from here on about cutting rates amid stubbornly high inflation.
The Fed officials' median forecast showed that inflation is likely to be higher than previously projected. The forecast for core PCE inflation was raised to 2.8% for 2024 and to 2.5% for 2025, up from 2.6% and 2.2% previously.
"Following the outcome of the December meeting, which was decidedly more hawkish than we anticipated, we change our outlook for Federal Reserve policy," Morgan Stanley said in a note.
Morgan Stanley analysts now expect the Fed to cut rates by 25 basis points twice next year, in March and June. They had previously expected the Fed to cut rates at its January, March, and May meetings.
The Fed's hawkish tone likely reflects the possible changes that U.S. President-elect Donald Trump is likely to bring, analysts said.
"What Trump does will be the main story for next year, and the biggest risk for rupee," a currency trader at a bank said.
"The Reserve Bank of India (RBI) will be quite busy."
The RBI has been regularly intervening in the forex markets to make sure that the pace of the rupee's deprecation is measured.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 85.24; onshore one-month forward premium at 19.5 paise
** Dollar index at 108.02; rallied more than 1% on Wed
** Brent crude futures down 0.7% at $72.9 per barrel
** Ten-year U.S. note yield at 4.51%; rose 12 basis points on Wed
** As per NSDL data, foreign investors sold a net $281 million worth of Indian shares on Dec. 17
** NSDL data shows foreign investors bought a net $14.5 million worth of Indian bonds on Dec. 17
