Rupee to rise after Powell reinforces expectations of Fed rate cut in September
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The Indian rupee is expected to rise on Monday, after U.S. Federal Reserve Chair Jerome Powell comments nearly confirmed a September rate cut, spurring a further drop in the dollar.
The 1-month non-deliverable forward indicated that the rupee will open at 83.80-83.82 to the U.S. dollar, compared with 83.89 in the previous session.
The dollar index is near its lowest in more than a year after Powell said on Friday at the Fed's Jackson Hole symposium that "the time had come for policy to adjust", reinforcing expectations that the Fed will cut rates at the next month's meeting.
The U.S. equities rallied on Friday, while U.S. Treasury yields dropped. Asian currencies rallied with the Indonesian rupiah leading the way.
The September Fed rate cut was already fully priced in before Powell's speech and that is why "its surprising to see a reaction to what was already expected", a currency trader at a bank said.
"It means that they were doubters that Powell would pivot, and now that he has confirmed, they have piled in," he said. For dollar/rupee, the "level to watch" on the downside is 83.75.
25 BPS or 50 BPS
The debate is now on whether the Fed will cut rates by 25 basis points or 50 bps at the September meeting and whether it will deliver the 100 bps of rate cuts in 2024 that investors have currently priced in.
The Sept. 6 U.S. jobs report will determine the quantum of the Fed's rate cut next month, ING Bank said in a note.
The Fed does not want further weakness in the U.S. labour market and hence another rise in U.S. unemployment to 4.4% or 4.5% could trigger a 50 bps move, it said.
Currently, futures are pricing in 60% odds of a 25 bps rate cut and 40% for a 50 bps.
KEY INDICATORS:
** One-month non-deliverable rupee forward at 83.88; onshore one-month forward premium at 7 paisa
** Dollar index down at 100.62
** Brent crude futures up 0.7% at $79.5 per barrel
** Ten-year U.S. note yield at 3.79%
** As per NSDL data, foreign investors bought a net $220.6 mln worth of Indian shares on Aug. 22
** NSDL data shows foreign investors sold a net $222.3 mln worth of Indian bonds on Aug. 22
