Fed Rate Cuts Boost Rupee Amid Widening US-India Rate Gap

The Indian rupee is poised to gain strength against the US dollar, trading around Rs 83.57, due to increased liquidity from Federal Reserve rate cuts. A Union Bank of India report forecasts positive momentum for the rupee, supported by foreign portfolio investor inflows and a weakening US dollar.

The Indian rupee is set to gain traction against the US dollar, trading around Rs 83.57, spurred by increased liquidity due to recent Federal Reserve rate cuts, according to a Union Bank of India report.

The report indicates that the rupee will likely trade in the range of Rs 83.27 to Rs 83.99, with the upper limit being its all-time low. Positive momentum for the rupee is anticipated, supported by foreign portfolio investor (FPI) inflows and a general weakening of the US dollar.

“Based on the current global scenario, we shift our technical stance that INR should take support of 83.27 and will find resistance around 83.77 followed by the crucial level of 83.99 (All-time highs),” the report stated. It added that if the rupee breaches this resistance level, it could potentially test levels as high as Rs 84.16, based on trends in the Non-Deliverable Forward (NDF) market.

Looking ahead, the report highlighted that the interest rate differential between the US and India is expected to widen. The Federal Reserve's recent 50 basis points rate cut in its September FOMC meeting contrasts with the Reserve Bank of India's (RBI) likely stance to maintain its “Withdrawal of Accommodation” policy due to rising food inflation. This widening differential is expected to attract more FPI inflows into India, providing further support to the rupee.

RBI data on External Commercial Borrowings (ECB) inflows indicates this trend. In July 2024, Indian firms, including non-banking financial companies (NBFCs), filed proposals with the RBI to raise USD 3.58 billion through ECBs via the automatic route. While this figure represents a slight year-on-year increase, the report expects it to climb further in the coming months, reflecting stronger inflows.

The report concluded that the combination of Fed rate cuts, a widening interest rate gap between the US and India, and increasing FPI inflows will continue to support the Indian rupee in the near future. (ANI)