Indian rupee drops with stocks, bonds as oil, inflation and Fed worries mount

Mumbai: The Indian rupee plummeted to its weakest point in over a month on Tuesday, settling at 95.9550 per dollar, marking its most significant daily decline since mid-July. The rupee's slide was primarily fueled by rising oil prices and expectations of a rate increase by the U.S. Federal Reserve this week. Brent crude oil surged over 2% to $108.20 a barrel, which heightened concerns about India facing a larger trade deficit and higher inflation.

India's goods trade deficit in August was narrower than forecasted, thanks to a decline in gold imports, which totaled $26.8 billion, falling short of economists' projections of around $32 billion. Moreover, signs of inflationary pressures have prompted traders to increase their bets on an upcoming Reserve Bank of India rate hike next month. Both major banks, Citi and Deutsche Bank, have moved up their rate hike predictions from December to October.

This development further pressured government bonds, with the benchmark 10-year bond yield soaring to its highest level since mid-May. The benchmark Nifty 50 index also suffered, ending the day down by approximately 1%. Radhika Rao, a senior economist at DBS, noted in a report that "a gradual broadening of price pressures is likely to keep inflation readings above 5% in the second half of the fiscal year, underscoring the need for a tighter monetary policy bias."

Focus is now shifting towards the U.S. Federal Reserve's decision on Wednesday, with markets pricing a 93% likelihood of a rate hike. Additionally, the Bank of Japan is anticipated to raise rates on Friday, adding weight to the concerns over India's economic stability.