The Indian rupee may drop to a record low at the open on Thursday despite Federal Reserve Chair Jerome Powell’s indication that there was room for rate cuts this year, which triggered a drop in the dollar index.
Non-deliverable forwards indicate the rupee will open at around 83.46-83.48 to the U.S. dollar, compared with 83.4350 in the previous session and weaker than the record low of 83.45 hit last Wednesday.
Understanding the Drop: What’s Causing it?
The key factor causing the rupee’s decline is the rise in global crude oil prices. Brent crude futures hovered near $90 a barrel on April 3.
- The US dollar was set for a fifth winning week against its major peers, the longest winning streak in 15 months. Overnight, it touched a two-month high of 103.59.
- The 10-year US Treasury yield was at 4.25%. It hit a 10-month peak of 4.32% on Thursday. Recent economic data indicate that the economy continues to be resilient, which is likely to keep US yields elevated.
- On the domestic front, the Indian benchmark 7.26% 2033 bond yield was trading at 7.23% after hitting a more than four-month high of 7.26% on Thursday.
- Market sentiments are hurt by fears that the US Federal Reserve will keep interest rates elevated for a longer duration, even though recent US economic data indicated a resilient US economy.
Is the Yuan’s Decline a Contributing Factor?
- A fall in China’s yuan also weighed on the local rupee. The yuan has depreciated 0.6% this week and 5.3% this year.
- A decline in China’s yuan against the US currency is feeding into the rupee. According to Reuters, the yuan has fallen more than 2 percent in three months, pressured by growing market expectations of further monetary easing to prop up the world’s second-largest economy.
- A fall in the yuan directly impacts the Indian currency given that New Delhi runs an almost 40 percent trade deficit with China and a “directional move in CNY (policy-or/and market-led) would deeply influence INR direction, and most Asian currencies,” Emkay Global analysts Madhavi Arora and Harshal Patel said in a report on March 27.
