Rupee ends at over two-week high as US Fed signals gradual tightening

The US Fed signaled that it is on track to raise interest rates later this year

The US Fed’s decision to go for gradual tightening helped the currency market due to which the rupee ended at an over two-week high as foreign flows continued in domestic markets and exporters were seen selling dollars.

The rupee ended at 63.73 compared with the previous close of 64.12 a dollar. The rupee had opened at 63.90 and during intra-day trades it touched a high of 63.71. The rupee had ended at 63.71 on June 1.

The US Fed, at its open market committee meeting, kept its near-zero benchmark interest rate unchanged and Fed chair Janet Yellen said the tightening would be “gradual,” and they wouldn’t follow a “mechanical” formula.

The US Fed signalled it was on track to raise interest rates later this year, though subsequent increases are likely to be more gradual than expected earlier.

“The US Fed's decision helped the rupee. Besides that monsoon has so far been normal which is adding to positive sentiments. Today (Thursday) there was dollar sale by exporters and custodian banks. The rupee may trade in the range of 63.50 to 64.50 for the rest of this month,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.

In fact, a few currency traders also said the state-run banks were buying dollars on behalf of the Reserve Bank of India (RBI) which limited the appreciation of the rupee on Thursday.

Ahead of the start of the two-day meeting of the US Federal Open Market Committee, the rupee had weakened to a level near the 21-month low.

However, currency experts agree the bias for the rupee continues to be towards weakening.

“In the near future the rupee may appreciate to 63.20 but the strengthening will be short-lived. This is because in order to boost the country's exports the rupee needs to weaken a bit,” said  Suresh Nair, director, Admisi Forex India.

Bond yields fall

Meanwhile, the 10-year benchmark yield decreased by eight basis points on Thursday, the most since May 11, to 7.95 per cent. “Further clarity on the Fed’s rate action will help restore stability for bonds,” said Ajay Manglunia, head of fixed income at Edelweiss Financial Services Ltd in Mumbai. As investors speculate on the timing of the first US rate hike, the yield on the 2024 securities jumped 21 basis points this quarter amid concern a rebound in Brent crude oil prices and potentially deficient monsoon rains fanning inflation.

The yield on sovereign bonds due May 2025 dropped by eight basis points to 7.76 per cent on Thursday.