Rupee to open little changed but Fed cut wagers, local tax cuts buoy sentiment
The Indian rupee is expected to open largely unchanged on Thursday, while sentiment will be supported by a broadly softer dollar and a local tax panel's tax cuts on hundreds of consumer items that are expected to boost growth.
The 1-month non-deliverable forward indicated the rupee will open in the 88.06 to 88.10 range versus the U.S. dollar, compared with 88.07 in the previous session.
The U.S. dollar was on the backfoot after data released on Wednesday pointed to weakening labour market, which reinforced expectations of a rate cut by the Federal Reserve.
Money markets are currently pricing in about 97% chance of the Fed cutting interest rates later this month, up from 89% a week earlier, CME FedWatch showed. They are also pricing in 139 basis points of easing by the end of next year.
Meanwhile, Indian Finance Minister Nirmala Sitharaman on Wednesday announced tax cuts on hundreds of consumer items ranging from soaps to small cars to spur domestic demand in the face of economic headwinds from steep U.S. tariffs.
"Lower Goods and Services Tax (GST) rates will be positive for growth in the second half of the year and FY27, besides improving operational efficiency and expanding the size of the formal economy," analysts at DBS said in a note.
Federal and state governments are estimated to lose 480 billion rupees ($5.49 billion) due to the cuts that will be implemented from September 22.
Following India's recent sovereign rating upgrade, DBS analysts don’t expect the government to compromise on the fiscal deficit target.
While a sentimental boost from a pickup in local equities and a broadly weaker dollar should help the rupee hold above its all-time low, importer hedging demand may keep a lid on sharp rallies for the currency, a trader at a large private bank said.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 88.18; onshore one-month forward premium at 11.25 paise
** Dollar index at 98.2
** Brent crude futures down 0.5% at $67.3 per barrel
** Ten-year U.S. Treasury yield at 4.22%
** As per NSDL data, foreign investors sold a net $106.4mln worth of Indian shares on Sep. 2
** NSDL data shows foreign investors bought a net $14.6mln worth of Indian bonds on Sep. 2
