Dwindling hopes of 50 bps Fed rate cut may push rupee to all-time low

The Indian rupee is likely to be under slight pressure at the open on Thursday after resilient US inflation dented hopes of the Federal Reserve opting for a large rate cut next week.

The one-month non-deliverable forward indicated that the rupee will open at 83.98-83.99 to the US dollar, compared with 83.9775 in the previous session.

The currency risks dipping past its lifetime low of 83.9850 hit last week.

"With US inflation out of the way, the base case now is for a 25-basis-point (bps) Fed cut next week," Srinivas Puni, managing director at FX advisory firm QuantArt Market Solutions, said.

"Still, 100 bps of cuts in total are expected in 2024, implying a 50 bp cut during November/December period. Dollar prognosis now hinges on whether the Fed will toe the market line and indeed go for four cuts."

The dollar currently "is in balance" and the rupee will remain in a range for longer at least until the Fed's Sept. 17-18 meeting.

US Treasury yields rose after a measure of US inflation increased more than expected, prompting investors to dial back bets of the Fed delivering aggressive rate cuts. US core inflation rose 0.3 per cent month-on-month compared to the 0.2 per cent pace expected by economists polled by Reuters.

The slightly hotter-than-expected monthly reading on US core inflation has seen traders converge on a 25 bps rate cut for the Fed's September meeting, Westpac bank said in a note.

Futures are now pricing a 85 per cent probability of 25 bps rate cut at next week's meeting. The odds of a 50 bps rate cut have dropped to 15 per cent, nearly half of what they were prior to the inflation data.

The dollar index inched up in Asia trade, taking support from the higher US yields. Most Asian currencies declined.