Indian rupee to rise after US yields reverse inflation-led spike, Fed hike bets remain low

Mumbai saw the Indian rupee poised for a rise at the opening bell on Thursday, propelled by a retreat in US Treasury yields following a spike caused by inflation data that remained higher than expected. Traders are currently pricing in limited possibilities of a Federal Reserve rate increase in October. The rupee is anticipated to open within the 95.02 to 95.06 range, having closed at 95.15 per dollar on Wednesday.

The Reserve Bank of India (RBI) is currently under scrutiny to determine the extent of its willingness to bolster the rupee. The central bank has already implemented a range of measures to curb dollar demand, complemented by direct sales of dollars. A currency trader from a bank asserts that the RBI's stance is "unmistakable" in its efforts to halt the currency's decline.

The trader further questions the limits of the RBI's actions and the market's tolerance for them, noting that signs of resistance were already apparent on Wednesday as the rupee rallied past the 95 mark. Initially, US Treasury yields surged following a September inflation report that surpassed expectations. This led to a sharp increase in traders' bets on a Federal Reserve rate hike this month; however, this surge has since reversed.

Analysts attribute the pullback to heightened risk aversion among investors. Morgan Stanley has also identified demand from institutional investors as a contributing factor to the downward trend in yields.