Indian Rupee likely extends previous week’s downfall on Tuesday

The Indian Rupee is projected to continue its decline against the US Dollar (USD) on Tuesday, following a drop in the previous week. Trading halted on Monday for Ganesh Chaturthi celebrations, the Indian Rupee depreciated by 1.1% over the past seven days, with the USD/INR pair reaching nearly 95.55. This decline is attributed to an increase in US Treasury Yields due to heightened Federal Reserve (Fed) expectations, particularly after the release of US Producer Price Index (PPI) report for August, which exceeded expectations.

Rising oil prices also contribute to the Rupee's downward trend, as economies reliant on oil imports, like India, tend to underperform when oil prices are high. A further rise in both US Treasury Yields and oil prices could intensify the pressure on the Indian Rupee. The 10-year US Treasury Yields are trading near their highest level since November 2023, at 4.99%.

The Federal Reserve (Fed) is expected to raise interest rates by 25 basis points (bps) to a range of 3.75%-4.75% at the upcoming monetary policy announcement on Wednesday. Strategists from Brown Brothers Harriman (BBH) anticipate the Federal Open Market Committee (FOMC) to hike interest rates, marking the first increase since July 2023.

Analysts from Deutsche Bank note that the recent supply disruptions in oil due to a pipeline shutdown in Saudi Arabia and the postponement of an Iran-Gulf states meeting to discuss a temporary shipping corridor have heightened concerns about regional supply security. The Indian Rupee is highly sensitive to external factors, including the price of crude oil, the value of the US Dollar, and foreign investment levels.

The Reserve Bank of India (RBI) intervenes in foreign exchange markets to maintain a stable exchange rate, as well as sets interest rates to control inflation, aiming for a 4% target. Higher interest rates generally strengthen the Rupee, as investors seek better returns by investing in countries with higher yields.