Hawkish Fed adds to Indian rupee troubles, traders watch 96/USD hurdle

Mumbai: The Indian rupee is set to face pressure on Thursday, potentially sliding below the 96 per dollar threshold, following the US Federal Reserve's interest rate hike and an indication of imminent further tightening. The rupee is projected to open slightly softer at around 96-96.05 per dollar, compared to its prior close of 95.9550.

The Federal Reserve increased interest rates by 25 basis points on Wednesday for the first time since 2023, with officials anticipating another rate hike this year. This move pushed the dollar index beyond the 100 mark, marking its highest level in over a month. Asian currencies experienced a dip on Thursday, while equities traded unevenly as investors grappled with the implications of higher global borrowing costs.

The Fed's rate hike came in the wake of a similar increase in Europe last week and ahead of a projected rise in Japan on Friday, as central banks worldwide confront rising inflation. "There are no immediate signs of inflation easing, particularly due to the stalemate in the Middle East. This suggests the Fed may need to continue tightening to meet its inflation target," stated Tai Hui, APAC chief market strategist at J.P.

Morgan Asset Management. Futures data suggest a 50% probability of an additional Fed rate hike next month to curb inflation, with a total of three rate hikes anticipated in this tightening cycle. The outlook for interest rates is expected to contribute to the pressure on the rupee, which is already under strain from surging oil prices and foreign portfolio withdrawals from Indian equities and bonds.

Traders noted that inflows resulting from the IPO of India's leading stock exchange, coupled with actions by the Reserve Bank of India, might provide some respite to the rupee. However, sentiment could deteriorate if the currency continues to weaken past 96 and remains at that level, the traders added. The National Stock Exchange of India (NSE) will commence subscriptions on Thursday after allocating shares worth $703 million to anchor investors on Wednesday.