Finance
The rupee rose sharply against the US dollar on Thursday, as the Federal Reserve’s latest monetary policy statement raised hopes that the central bank is nearing the end of its tightening cycle, according to dealers.
The rupee was trading at 82.29 per dollar at 10 a.m. IST, down from 82.67 per dollar at the previous close. The rupee has gained 0.5% against the US dollar so far in 2023.
The US Federal Open Market Committee raised interest rates by 25 basis points late Wednesday, bringing the federal funds rate to 4.75-5.00 percent. With the most recent increase, the rate has risen to 475 basis points since March 2022.
Even as it raised interest rates, the Fed’s language about future tightening was perceived as softer than before, especially in the light of the recent crisis in the US banking sector.
Given the volatility in the US banking system caused by tighter financial conditions, the US dollar index fell sharply on Thursday, with some segments of markets even pricing in Fed rate cuts later in 2023.
Higher US interest rates typically result in global investment flows to the world’s largest economy, causing the dollar to rise. This puts downward pressure on emerging market currencies like the rupee.
The US dollar index was at 101.78 at 10 a.m. IST, down from 103.28 at the close of Indian market hours on Tuesday. On Wednesday, the domestic currency market was closed.
“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.
Following the Fed’s statement, domestic government bonds rose in line with lower US bond yields. The yield on the 10-year US Treasury bond was 3.45 percent, down 14 basis points in the last few days.
Lower US bond yields make fixed-income instruments more appealing in emerging markets such as India.
The yield on the 10-year benchmark paper in India last stood at 7.33 percent, down from 7.35 percent at the previous close. Bond prices and yields move in opposite directions.
Source:BS
