The rupee strengthened sharply versus the US dollar on Thursday as the Federal Reserve’s latest monetary policy statement sparked hopes of the central bank nearing the end of its tightening cycle, dealers said.
At 10 am IST, the rupee was at 82.29 per dollar as against 82.67 per dollar at previous close. So far in 2023, the rupee has gained 0.5 per cent against the US dollar.
Late Wednesday, the US Federal Open Market Committee raised interest rates by 25 basis points, with the federal funds rate now at 4.75-5.00 per cent. With the latest hike, the rate has increased to 475 points since March 2022.
Even as it hiked interest rates, the Fed’s language regarding future tightening was perceived to be softer than before, especially in the light of the recent crisis in the US banking sector.
“Largely as we had expected, the Fed hiked 25bp at its March FOMC meeting but shifted its guidance from “ongoing increases” in favour of the less hawkish and less committal “some additional policy firming.” Consistent with that change, the median 2023 dot still shows one more hike this year,” Madhavi Arora, lead economist at Emkay Global Financial Services, said.
“We continue to look for one more 25bp hike in May and an extended pause before the Fed eases in early 2024… We note before SVB (Silicon Valley Bank) event, markets were pricing in a peak rate of 5.6 per cent,” she said.
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With some segments of markets even pricing in rate cuts by the Fed later in 2023, given the volatility in the US banking system brought about by tighter financial conditions, the US dollar index weakened sharply on Thursday.
Higher US interest rates typically lead to global investment flows heading to the world’s largest economy, thereby pushing up the dollar. This exerts pressure on emerging market currencies such as the rupee.
At 10 am IST, the US dollar index was at 101.78, sharply lower than 103.28 at the close of Indian market hours on Tuesday. The domestic currency market was shut on Wednesday.
“After Fed raised rates by 25 bps but gave a dovish outlook dollar index fell to 102.20 levels and Asian currencies all rose against the dollar,” Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors, said. He estimates a range of 82.20-82.80 per dollar for the day.
According to Shinhan Bank Vice-President Kunal Sodhani, the rupee could also gain from season demand for the local currency at the end of the financial year, which is when exporters typically sell dollars to close their accounts. Sodhani predicted a range of 81.80-82.80 per dollar for the rupee till end the end of the month.
Domestic government bonds strengthened in line with softer US bond yields following the Fed’s statement. Yield on the 10-year US bond was at 3.45 per cent, having registered a decline of around 14 bps over the last couple of days.
Lower US bond yields increases the appeal of fixed-income instruments in emerging markets such as India.
Yield on the Indian 10-year benchmark paper was last at 7.33 per cent as against 7.35 per cent at previous close. Bond prices and yields move inversely.