The Indian opened 11 paise lower at 95.49 against the US dollar on Monday, 31 August, as investors increased bets on a Federal Reserve rate hike at its next policy meeting following hawkish comments from Fed Chair Kevin Warsh.
Market expectations for a rate hike at the September 15-16 meeting rose to nearly 60%, up from around 35% before Warsh’s closely watched speech on Friday. He said the US central bank would “have work to do” if policymakers were not confident that inflation was moving back towards its 2% target.
Warsh’s comments marked his clearest indication yet that further rate increases could be required to contain persistent inflationary pressures. Following the remarks, the index and Treasury yields climbed, while US equities declined. US equity futures also pointed to a weaker opening on Monday.
The impact on Asian currencies was relatively muted, with regional currencies trading mixed and most moves limited to around 0.2%.
Meanwhile, rising crude oil prices added pressure on the rupee. Brent crude climbed to around $90 a barrel on Monday after the US attacked an Iranian island in the Strait of Hormuz, prompting retaliation from Tehran.
For the rupee, the 95.70-95.80 level is seen as a well-defended zone, with the Reserve Bank of India expected to intervene to contain any sharp depreciation towards these levels, a currency trader at a bank told Reuters.
Crude oil outlook remains uncertain
“Oil is playing a different tune,” with cooling to around $88-$89 a barrel as more crude begins to flow out of the Gulf, experts said. However, developments in Venezuela have added a fresh layer of uncertainty to the global oil market.
The US decision to take majority control of a large portion of Venezuela’s oil reserves has triggered political backlash within the country and across Latin America. Market experts said greater US involvement could eventually pave the way for higher Venezuelan oil production and additional supply, which would be negative for crude prices.
“While increased US involvement in Venezuela could eventually translate into more oil supply, the immediate impact is likely to remain limited as the market assesses the political and operational implications,” experts said.
FCNR scheme closure removes a key cushion
Back in India, 31 August marks the final day of the RBI’s special FCNR deposit scheme, which has attracted more than $65 billion in fresh dollar inflows. Experts said these inflows have provided an important cushion for the rupee and helped strengthen India’s foreign exchange reserves.
India’s forex reserves have climbed to a record $729.33 billion, providing the Reserve Bank of India with greater firepower to manage volatility in the currency market.
“The FCNR inflows have been an important source of dollar liquidity and have helped strengthen the RBI’s reserve position. With the scheme closing, the key question is whether other sources of dollar inflows can compensate for the loss of this temporary support,” experts said.
Rupee faces multiple headwinds
The rupee is now facing a combination of external and domestic pressures. A more hawkish Federal Reserve could support the US dollar and trigger capital outflows from emerging markets, while geopolitical tensions around the Strait of Hormuz could keep crude prices elevated.
At the same time, the uncertainty surrounding Venezuela adds another variable to the global oil outlook. Although softer crude prices could offer some relief to India’s import bill, the closure of the FCNR window means the rupee will have one less source of dollar liquidity support.
“Overall, the near-term outlook for the rupee remains cautious. A hawkish Fed, geopolitical risks around Hormuz and the closure of the FCNR deposit window could keep volatility elevated, even though lower oil prices provide some relief,” experts said.
Rupee Outlook
According to Amit Pabari, MD, Research Team, CR Forex Advisors, said in the near term, 95.10 to 95.30 will act as a strong support zone, with close to a 90 per cent chance the pair holds here. On the resistance side, 95.80 is key. A break above it on fresh negative news could send the pair swiftly towards 96.20 and 96.50. For now, expect the rupee to consolidate between 95.20 and 95.80, though the broader view of 96.20 to 96.50 stays intact.
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