Rupee May Hit Record Low Before US Inflation

The Indian rupee is expected to reach a record low at the opening on Wednesday, ahead of significant U.S. inflation data and new interest rate projections from Federal Reserve officials. Non-deliverable forwards suggest the rupee will start trading at 83.58-83.60 to the U.S. dollar, down from 83.5650 in the previous session and surpassing the all-time low of 83.5750 set in April. On Tuesday, the rupee fell below the long-standing support level of 83.50-83.55.

The rupee has faced challenging days recently. Weighed down by political uncertainties and a rapidly strengthening dollar, the Indian currency reached an all-time closing low of 83.57 against the U.S. dollar on Tuesday.

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On Wednesday, the Indian rupee came close to hitting an all-time low, opening at 83.54. Despite this, the currency remains under pressure. The risk of reaching a record low, which could significantly impact India's forex reserves and inflation, looms large as the US Federal Reserve's rate cut decision and key inflation data are anticipated tonight.

While the dollar remained stable ahead of the US inflation data release scheduled for Wednesday, major Asian currencies declined by 0.1% to 0.7% during trading hours. The upcoming US inflation data is anticipated to provide market insights on the likely trajectory of rate cuts by the US Federal Reserve.

According to some market participants, the central bank has been keeping the rupee within a certain range by counteracting the pressure caused by the ongoing outflow from domestic equities, which is driven by caution ahead of election results. Sources suggest that the Reserve Bank of India may intervene in the non-deliverable forward (NDF) market before it opens, as it has done previously, to prevent the rupee from falling to a new low.

“The RBI is in the market every day. We are not expecting any volatility until the election results. The rupee might trade in the range of 83.30 a dollar to 83.70 a dollar in the current month,” said Anindya Banerjee, VP - Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.

Some investors have opted to remain on the sidelines due to uncertainty surrounding the general elections. Concerns have been raised by lower voter turnout, suggesting the ruling party might not secure a clear majority as previously anticipated. “The rupee will continue to be range-bound this month. After 83.50 per dollar, the next resistance level is around 83.65 per dollar,” noted a dealer at a state-owned bank.

With the geopolitical situation stabilizing, optimism about potential rate cuts by the US rate-setting panel in September is anticipated to support the rupee in the near term, according to market participants.

Anand James, the Chief Market Strategist at Geojit Financial Services explained this. He said, “The US dollar hit a four-week high on Tuesday, with the dollar index rising 0.1 per cent to 105.24, peaking at 105.46- its highest since May 14- ahead of a key inflation report. Strong May jobs data raised concerns about persistent inflation, making a rate cut less likely soon.”

The demand for the US dollar may increase further, depending on the consumer price inflation (CPI) data and the Federal Reserve's decision on interest rates. Additionally, ongoing volatility in Europe and the Middle East could prompt investors to seek out safe haven assets.

The U.S. central bank is broadly anticipated to maintain the current policy rate in today's announcement and at the upcoming meeting in July. Policymakers will release their new interest rate projections, which could reflect a hawkish tone, according to a note from HSBC Bank. The median estimate for 2024 may increase, suggesting only 25 basis points (bps) or 50 bps of cuts this year, compared to 75 bps in the previous projection. Additionally, there might be an increase in the 'longer-run' dot to 2.7%.