Rupee slips to 1-month low on hints of Federal Reserve interest rate hikes

The rupee on Thursday slumped by 33 paise to settle at Rs 82.51 per dollar, marking a one-month low that came after the minutes of the US Federal Open Market Committee’s June meeting suggested that the rate-setting panel might go for a 25 basis points hike in July, said dealers.

Oil importers stocked up on the greenback which weighed on the rupee, too. The rupee fell 0.35 per cent against the dollar on Thursday, the steepest in a month after June when it fell 0.45 per cent. It had closed at Rs 82.23 per dollar on Wednesday.

“The rupee fell by 33 paise as oil companies raised the dollar demand and took the dollar higher to Rs 82.55 per dollar as exporters got another chance to hedge their dollar receivables after a hawkish Fed,” said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.

“Rupee may continue to underperform till Rs 82.80-90 per dollar, where the RBI (Reserve Bank of India) may step in to sell dollars which it bought recently at Rs 81.70 per dollar levels,” said Bhansali.

As exporters took measures to protect their receivables, forward premiums declined from a recent peak of 1.87 per cent to 1.60 per cent, dealers said.

Despite choosing not to raise interest rates in June, the Federal Open Market Committee is unlikely to follow the same course of action in July, dealers said. With US inflation persistently remaining above the Federal Reserve's 2 per cent target rate, minutes from the rate-setting panel’s meeting indicate members consider maintaining a restrictive stance on monetary policy to be fitting for the future. The minutes said that "almost all participants" noted in their economic projections that they deemed it necessary to implement additional increases in the target federal funds rate during 2023.

Around 90 per cent traders expect a 25 basis points hike by the US Federal Reserve in July, according to CME Fed watch tool.

The US Fed minutes also impacted the government bond market with the yield on the benchmark 10-year 7.26 per cent, 2033 government bond also inched up by 3 basis points to settle at 7.15 percent. The 10-year paper settled at 7.11 per cent yield level on Wednesday.

“The minutes showed that all the members agree on a further rate hike, earlier we were thinking maybe one or two members would not agree with the decision,” said a dealer at a state-owned bank in India. “The domestic market is going to track the US only. And the supply pressure doesn’t have any role to play here, because the market was ready for it.”

Indian dealers said that the weekly government bond auction on Friday might paint a clear picture of the role of hefty supply in the current quarter. The spread between the state government bonds and central government bonds might widen up to 35-40 basis points if the large supply of the government bonds comes into play, they said.