Rupee to rise on drop in US yields after Fed tweaks balance sheet runoff
The Indian rupee is likely to strengthen further on Thursday boosted by the dip in U.S. Treasury yields after the Federal Reserve decided to slow the pace of balance sheet runoff and indicated that it remained on pace to cut rates twice this year.
The 1-month non-deliverable forward indicated that the rupee will open at 86.34-86.36 to the U.S. dollar compared with 86.4425 in the previous session. The rupee is on a six-session winning run, during which it has rallied by over 1%.
The extent of the ongoing "against-the-trend" rally in the rupee has "definitely been a surprise", a currency trader at a Mumbai-based bank said.
"I would not bet on this going any further from here."
The 2-year U.S. Treasury yield declined about 6 basis points on Wednesday to slide below 4%. The Fed said that beginning next month it will slow the pace of its balance sheet reduction (quantitative tightening) and the dot plot indicated that the U.S. central bank will cut rates twice this year, boosting demand for Treasuries.
Morgan Stanley in a note said the decision to slow the pace of balance sheet runoff was a surprise. Goldman Sachs said it expected the Fed to slow the pace of runoff at a later meeting in May.
ING Bank said the Fed's decision was "big news" and U.S. Treasuries are considering this early move on quantitative to be bullish.
On the Fed's median dot plot, which was unchanged from December, analysts pointed out before the meeting there were worries that policymakers would take a more hawkish tone amid the risk of higher inflation posed by the new U.S. tariffs.
The Fed did raise its forecasts for inflation, while cutting its projections on growth.
KEY INDICATORS:
One-month non-deliverable rupee forward at 86.65; onshore one-month forward premium at 24 paise
Dollar index down at 103.36
Brent crude futures up 0.4% at $71.1 per barrel
Ten-year U.S. note yield at 4.25% As per NSDL data, foreign investors bought a net $82mln worth of Indian shares on Mar. 18
NSDL data shows foreign investors sold a net $14.5mln worth of Indian bonds on Mar. 18
