Rupee Strengthens Amid Dollar Inflows
The Indian rupee experienced a slight uptick on Tuesday, supported by inflows of dollars, contrasting with the weakening trend seen in most Asian currencies, attributed to the rise in U.S. bond yields.
Numeric Detail: The rupee (USDINR) stood at 82.9850 against the U.S. dollar as of 10:20 a.m. IST, showing a marginal strengthening compared to its previous close at 83.0150.
Dollar Index and Bond Yields: The dollar index (DXY) remained steady around 104.4, while the 10-year U.S. Treasury yield (US10Y) stood at 4.29%. Notably, the yield has increased by 34 basis points in February, dampening expectations of early and significant rate cuts by the Federal Reserve.
Factors Boosting the Rupee: Mild inflows of dollars contributed to the rupee’s rise in early trading, as indicated by a foreign exchange trader at a state-run bank. Additionally, the presence of dip-buying demand has maintained the pair within a narrow range.
Debt Inflows and Equity Flows: Despite some weakness in equity flows, debt inflows into India have provided support to the rupee in recent sessions. Foreign investors have notably purchased Indian bonds worth nearly $2 billion in February, while also engaging in net selling of equities worth $455 million.
Market Trends and Outlook: The Thai baht experienced a decline of nearly 0.4%, leading losses among Asian currencies. Meanwhile, the offshore Chinese yuan (USDCNH) witnessed a slight increase following China’s unexpected reduction in a benchmark reference rate for mortgages.
Near-Term Projection and Focus Areas: The rupee is anticipated to continue trading within a narrow range between 82.90 and 83.15 in the near term, as highlighted by Dilip Parmar, a foreign exchange research analyst at HDFC Securities. Market attention is directed towards the release of the minutes from the Fed’s latest policy meeting, which could provide insights into policymakers’ views on interest rate trajectory.
Shift in Rate Cut Expectations: The likelihood of a rate cut in May has decreased to approximately 35%, down from slightly over 60% a week earlier, according to the CME FedWatch tool.
Key Takeaways:
- The Indian rupee strengthened marginally supported by dollar inflows.
- Despite rising U.S. bond yields, debt inflows into India provided support.
- Market sentiment is cautious pending the release of Fed meeting minutes.
- Expectations of a May rate cut by the Fed have declined significantly.