Rupee slides as US CPI data stokes speculation of 100 bps Fed hike

Higher US interest rates typically leads to a stronger dollar and reduces the appeal of emerging market assets for global investors

The rupee weakened sharply against the dollar on Wednesday as a higher-than-expected US inflation print led to anticipation of a steep rate hike by the Federal Reserve, leading to global strengthening of the greenback.
 

Government bonds also weakened as the US inflation data resulted in sharp rise in the country’s bond yields, reducing the appeal of fixed-income assets in emerging markets.

The rupee closed at 79.44 per US dollar as against 79.15 per US dollar on Tuesday. So far in 2022, the domestic currency has weakened 6.4 per cent against the dollar. Yield on the 10-year benchmark government bond climbed 4 basis points to settle at 7.12 per cent. Bond prices and yields move inversely.

Data released after Indian trading hours on Tuesday showed that consumer inflation clocked in at 8.3 per cent in the US in August, lower than 8.5 per cent a month ago, but higher than market expectations of around 8.1 per cent.

The data has led to speculation of the Federal Reserve announcing a rate hike of a 100 basis points at its next policy statement on September 21. The last time the Fed had lifted rates by 100 bps at a single meeting was in 1981.

Following the data, yield on the two-year US Treasury note surged more than 20 bps to a 15-year high of 3.79 per cent, while the 10-year US yield rose 6 bps to 3.42 per cent.

Higher US interest rates typically lead to a stronger dollar and reduce the appeal of emerging market assets for global investors. At 3.30 pm IST on Wednesday, the US dollar index was at 109.31 as against 107.90 at the same time on Tuesday.

Traders, however, said likely market interventions by the Reserve Bank of India in the form of dollar sales, had reined in the rupee’s weakness. The RBI has heavily drawn down in its foreign exchange reserves over the last few months to prevent excessive volatility in the rupee.

“RBI intervention and FPI flows may have capped the advance beyond 79.60. The sharp drop in the forward premium could be a sign of RBI selling in forwards. Post US CPI, odds of a 100-bps hike next week has increased. These odds can keep USDINR supported till Fed meeting. We expect a range of 79.20 and 79.80 on spot,” Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities said.
 

Over the past couple of days, foreign investors have been deploying funds in Indian sovereign debt in anticipation of its inclusion in a global bond index. Such a move is estimated to bring in overseas debt flows worth around $30 billion in a year, analysts said.

The optimism over the process also kept domestic bond yields anchored despite the sharp selloff in the US bond market, dealers said.

“The market participants are also optimistic about Indian bond inclusion in the JPMorgan Government Bond Index-Emerging Markets which could bring around $30bn in inflows if included. In the near-term, spot USDINR is expected to trade in the range of 78.70 to 79.65,” Dilip Parmar, research analyst at HDFC Securities said.