On Tuesday, the Indian rupee opened 1 paise lower at Rs. 94.69 against the US dollar amid rising hopes of an interest rate hike from the Federal Reserve, despite the relief from lower crude oil prices. Positive steps toward a US-Iran peace deal have kept Brent crude below the $80 level; however, rising US Treasury yields and a stronger dollar continue to pressure currencies.
According to the CME FedWatch Tool, traders now expect an 88% chance of a rate hike in December, up from 61% before the Fed meeting last week.
Market participants believe that the direction of the rupee is now more from the Federal Reserve monetary policy outlook than from crude oil movements.
A currency trader at the private sector bank told Reuters, “The risk on the rupee seems to have now tilted towards the Fed.” Higher US Treasury yields have taken the place of oil prices as a challenge to the domestic currency, the trader added, noting that prices for the heavy crude oil have been below $80 per barrel.
According to Fed funds futures, traders expect around a 75% chance of a September Federal Reserve rate hike. The 2-year US Treasury yield has risen to its highest level in 16 months, helping the US dollar and dampening Asian currencies, such as the rupee.
Despite the geopolitical uncertainty, crude oil prices eased in June. Peace talks in the Middle East have made some progress, and a 60-day postponement of the Iranian oil sanctions has lowered supply fears, bringing the price of Brent crude down under $80 per barrel and lowering the cost burden for India on oil imports.
Meanwhile, the rupee also may have some room to appreciate as the Real Effective Exchange Rate (REER) improved to 86.2 in May from 87.76 in April, reflecting the currency's relative undervaluation, analysts said.
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Exporters have started hedging activity in recent trading sessions in an attempt to secure a better deal on foreign exchange rates, Reuters reported. But dollar demand in the country is robust, and there is no scope for notable appreciation in the rupee.
Market participants are also keeping a close watch on the ongoing trade negotiations between India and the US as they hope for an interim trade deal to boost India's ability to export over the medium term and to allow more foreign capital inflows.
For the rupee, the Rs. 94.30 level is a strong support after holding multiple times in the recent sessions, with Rs. 94.80 being the immediate resistance level. A continuation above Rs. 94.80 may pave the way towards Rs. 95.20.