Indian rupee set for mild relief from dip in oil, fading Fed October hike bets

The Indian rupee may experience a brief respite on Monday, as softer oil prices and reduced expectations of an October Federal Reserve rate hike alleviate pressure on the currency. The rupee is projected to begin trading around the 96.22-96.26 range, up from its previous level of 96.3150 to the dollar. Financial markets in India were closed on Friday due to a holiday.

The rupee has been experiencing sustained pressure, falling below the 96-per-dollar mark to a new two-month low. Factors contributing to the currency's decline include a surge in US Treasury yields, which have bolstered the dollar, and ongoing high oil prices. The Reserve Bank of India has been actively intervening in the market to mitigate the rupee's decline.

However, with the 96-per-dollar level, a key market indicator, now firmly crossed, the currency's weakening potential appears heightened. Traders anticipate the Reserve Bank may step in to support the rupee, but the likelihood of a further depreciation has increased following the breach of the 96-per-dollar level. The probability of a Federal Reserve rate hike during this month's meeting has dropped to approximately 20 percent, following the US economy's lower-than-expected job growth.

Initial investor reactions included buying Treasuries, but this shift reversed, highlighting the inflationary pressures affecting US bond markets. Morgan Stanley's recent note suggests that any short-term relief for the rupee from revised Fed expectations may be short-lived, given lingering inflation concerns. Meanwhile, oil prices declined on Monday due to higher crude exports from the Middle East and increased oil stockpiles released by Group of Seven nations, alleviating supply worries.