Rupee may not build on recovery despite renewed Fed rate-cut hopes

The non-deliverable forwards indicated that the Indian rupee is unlikely to recover more on Thursday despite renewed hopes that the US Federal Reserve may cut interest rates this quarter.

The 1-month non-deliverable forward indicated that the rupee would open at 86.40 to the US Dollar, compared with 86.3625 in the previous session.

The local currency had its best day in more than seven months on Wednesday and was among the top-performing Asian currencies, helped by December’s narrower-than-expected merchandise trade deficit.

The reason that the rupee will not likely rise on Thursday, “is probably the underlying (weak) outlook”, oil prices and the “always present” risk of US tariffs, a currency trader at a bank said.

The U.S. Treasury yields fell, equities rallied, and the dollar dipped overnight after a widely measured gauge indicated that inflation is slowing again. The US core consumer price index (CPI) rose 0.2 per cent month on month in December against a 0.3 per cent increase expected by economists polled by Reuters.

“The details of the CPI report are benign and should give the Fed more confidence that the recent acceleration in inflation was just a bump,” Morgan Stanley said in a note.

The investment bank said the inflation report increased its willingness to position for the Fed March rate cut.

Interest rate futures were priced in a slightly higher probability of a rate cut at the March meeting. At the Jan. 28-29 meeting, the futures indicate that the US central bank will make no changes to the policy rate.

Relief for Asia

Asian currencies rose on Thursday, receiving relief just days before US President-elect Donald Trump’s inauguration. Worries over Trump’s trade policies and the jump in US yields have undermined the appeal of Asian currencies.

The uptick in Asia currencies “could just be a temporary reprieve” amid looming US tariff hikes, MUFG Bank said.