Indian Rupee holds onto two-month high against US Dollar

The Indian Rupee (INR) maintained its two-month high against the US Dollar (USD) on Wednesday, hovering near its two-month low of 94.80 recorded the previous day. The strengthening US Dollar is attributed to heightened expectations of the Federal Reserve (Fed) tightening monetary policy during the upcoming meeting. The US Dollar Index (DXY), which measures the Greenback's value against six major currencies, rose by 0.13% to around 99.80, its highest level in over two weeks.

Strategists at Brown Brothers Harriman forecasted a 67% probability of a 25 basis points (bps) hike in Fed funds on September 16, indicating 60 bps of tightening over the subsequent twelve months. Global inflation fears, driven by escalating oil prices due to ongoing tensions between the United States and Iran, have fueled these expectations.

With only five vessels passing through the Strait of Hormuz, a crucial energy supply route, and attacks exchanged between the US and Iran, traders are wary of further disruptions. On Tuesday, US President Donald Trump announced strikes on Iranian targets near the Strait of Hormuz, claiming it was a response to Iran's failed attempt to deploy sea mines.

Investors will closely monitor the US Nonfarm Payrolls (NFP) report for August, as well as the ADP Employment Change for August, both set to be released on Friday. Standard Chartered upgraded its India GDP growth forecast to 7.2% for FY27 (year ending March 2027), citing stronger-than-expected Q1-FY27 GDP growth of 7.8% and momentum in July.

Despite this optimistic outlook, the bank anticipates a slowdown in H2-FY27, citing factors such as El Niño's impact on agricultural output, higher inflation, and diminishing tailwinds from GST cuts. The INR remains sensitive to external factors, including oil prices, the US Dollar's value, and foreign investment levels. The Reserve Bank of India (RBI) intervenes in foreign exchange markets to stabilize the exchange rate and control inflation at its 4% target by adjusting interest rates.