Indian rupee to weaken as oil, US yields weigh; fading Fed hike bets offer no relief

Mumbai: The Indian rupee is set to weaken on Thursday due to rising oil prices and US Treasury yields, despite fading hopes of a Federal Reserve rate increase this October. Traders anticipate the rupee to open between 95.96 and 95.98 against the dollar, a slight improvement from Wednesday's closing rate of 95.83. While the Reserve Bank of India (RBI) may intervene to prevent the rupee from dropping below 96, the 96 level remains a significant psychological and technical barrier.

Anil Bhansali, head of advisory at Finrex Treasury Advisors, explains that the rupee has shown resilience each time it nears this level due to RBI's actions. However, Bhansali believes that the rupee's downward pressure will continue, as high oil prices and rising US yields leave little room for the RBI to stop the decline. Oil prices for December delivery surged nearly 2% on Wednesday, propelled by stalled US-Iranian negotiations and tightening fuel markets, marking a 14% gain since September.

Meanwhile, the 10-year US Treasury yield rose to levels not seen since 2007, driven by weak August inflation data and the fading expectation of an October Fed rate hike. Despite softer-than-expected inflation data, longer-dated yields remained pressured by ongoing concerns about inflation, limiting relief from the improved August data.

US bond yields experienced their largest monthly increase in years during September, with the Middle East conflict exacerbating oil price volatility and heightening inflation fears. The odds of a Fed rate hike this month fell below 40%, down from over 70% a week prior.