The Indian rupee is likely to open broadly unchanged on Tuesday, with traders expecting a range-bound move as they await the US Federal Reserve’s monetary policy decision later in the week. Non-deliverable one-month forward contracts suggest the rupee, INR=IN, will start trading around 83.87-83.88 against the US dollar, indicating a near-flat change from its Monday closing rate of 83.8875.
Despite a rally in Asian currencies, driven by rising hopes that the US Federal Reserve may implement a sizeable rate cut on Wednesday, the rupee is bucking the trend. Traders said the absorption of foreign currency inflows by the Reserve Bank of India and persistent dollar demand by local importers are supporting the rupee’s stability.
State-owned banks have been aggressively buying dollars at the 83.85 level, which may well be related to customer flows. The sheer continued build-up of foreign exchange reserves in India, which hit an all-time high of $689.2 billion last Friday, reflects that the Reserve Bank of India has been absorbing dollars to adjust to currency movements.
The dollar index stood at 100.6, down 0.4% on Monday, after the probability of a 50-basis-point cut by the Federal Reserve rose to 67% from 50% on Friday, according to CME’s FedWatch tool. Falling U.S. bond yields and advances in most Asian currencies, such as a 0.8% gain in the Korean won, indicate these market trends.
MUFG Bank adds that “US retail sales figures due later today” will also decide whether the Fed will cut by 25 or 50 basis points and add to existing debates over the central bank’s policy path.
The rupee is likely to remain more or less stable in the near term as market participants await further news, but its movements would closely reflect the future decision of the Federal Reserve.
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