The opened 3 paise lower at 96 against the US dollar on Thursday, 17 September, after the raised interest rates and indicated that another hike could follow.
The Fed raised its policy rate by 25 basis points on Wednesday, marking its first rate increase since 2023. Policymakers also signalled the possibility of one more hike this year. The move lifted the dollar index above 100 to its highest level in more than a month.
Asian currencies weakened on Thursday, while regional equities traded mixed as investors assessed the impact of higher global borrowing costs. The Fed’s rate increase comes after a hike in Europe last week and ahead of an expected increase in Japan on Friday, as central banks continue to respond to persistent inflation pressures.
Fed adds another layer of pressure
The US Federal Reserve raised interest rates by 25 basis points on Wednesday, taking the benchmark rate to 3.75%-4%, in its first hike since 2023. While the move was largely expected, the Fed’s guidance drew greater attention. Its latest projections showed 16 of 18 policymakers expecting at least one more rate hike this year.
Fed Chair Kevin Warsh said inflation remains elevated and stressed the need for a more timely return towards the central bank’s 2% target. The hawkish tone strengthened the dollar and pushed higher, adding to pressure on emerging-market currencies.
According to market experts, higher US interest rates can make dollar-denominated assets relatively more attractive, potentially affecting capital flows towards emerging markets. For India, this comes at a time when foreign portfolio investor (FPI) flows have turned weaker.
FPI outflows add to rupee pressure
FPIs have reportedly withdrawn around ₹29,679 crore from Indian equities in the first half of September, reversing the buying trend seen over the previous two months.
Market participants say the combination of a stronger dollar, higher US yields and foreign outflows could keep the rupee under pressure. The currency’s trajectory will also depend on the extent of RBI intervention and movements in global crude prices.
Oil remains another key concern
Brent crude continues to trade above $100 a barrel, adding to concerns for oil-importing economies such as India. Although prices eased after Saudi Arabia arranged additional crude shipments through Oman, the broader supply situation remains uncertain.
According to market experts, persistently high crude prices could increase India’s import bill and add to inflationary pressures, particularly if the rupee remains weak. The combination of elevated oil prices and a stronger dollar, therefore, remains an important risk for the currency.
US tariff threat adds to uncertainty
Another risk for India comes from proposed US measures targeting countries that purchase Russian oil and gas. The US House has advanced legislation that could authorise tariffs of up to 100% on such countries, although the proposal still needs to clear further legislative steps.
Experts said any escalation on this front could have implications for India’s trade flows and add another layer of uncertainty for the rupee. However, the potential impact will depend on the final legislation and its implementation.
RBI liquidity operation in focus
The Reserve Bank of India is also set to conduct the first tranche of its planned ₹50,000 crore open-market bond sale, worth ₹1 lakh crore. The operation aims to absorb surplus rupee liquidity from the banking system.
The RBI has already been using variable-rate reverse repo (VRRR) operations to manage liquidity, with the banking system surplus remaining elevated. Experts said liquidity absorption could provide some support to the rupee by reducing excess rupee supply, although it may not fully offset global pressures from a stronger dollar, higher US yields and elevated crude prices.
What experts are watching next
According to market experts, the rupee’s near-term direction will depend on the Fed’s rate trajectory, the dollar index, US Treasury yields, crude oil prices, FPI flows and RBI intervention.
While the RBI’s liquidity-management measures and potential currency-market intervention could provide some cushion, experts said the broader global backdrop remains important for determining the rupee’s movement in the near term.
Rupee Outlook
Amit Pabari, MD, Research Team, CR Forex Advisors, said the rupee has remained around the 96-per-dollar level for the past two sessions, while the global backdrop has turned less favourable.
“With the dollar strengthening, US rates moving higher and crude oil remaining above $100, the chances of USD/INR breaking above 96.00 have increased,” Pabari said.
He added that a sustained move above the 96.00 level could pave the way for USD/INR to move towards 96.30–96.50 in the near term.
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