Rupee rises to best weekly gain so far this year amid Fed rate cuts

Rupee gain: In the strongest weekly showing yet this year, the Indian rupee strengthened against the US dollar on Friday as the Federal Reserve's surprise interest rate cut by 50 basis points earlier in the week gave a fresh boost to its appreciation. The rupee traded at 83.5450 as of 10:35 a.m. IST, up 0.1 per cent from Thursday's close of 83.68.

The up move is coming as foreign banks increase dollar offers, while the long dollar-rupee positions in the non-deliverable forwards NDF market unwind, a trader at a state-run bank said. The rupee has rallied for five consecutive trading sessions, rising 0.4 per cent, and will be in a position to make its best weekly gain since December 2023.

A strong fuel to the rupee's gain is portfolio inflows, which have seen overseas investors net buy more than $7 billion in Indian stocks and bonds this September, the biggest monthly inflow so far in 2024. Meanwhile, the dollar index has hovered near a year-to-date low of 100.5, supporting most Asian currencies.

Experts were of the view that the Reserve Bank of India has, indeed, turned far more lenient and that the recent approach towards the USD/INR pair has been a big shift for the RBI . According to Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors: "The central bank seemed to have eased its earlier grip on the currency pair, which again helped the rupee to rally further.".

Further, dollar-rupee forward premiums have increased, as the 1-year implied yield has jumped 3 basis points to 2.35 per cent, the highest since April 2023. The yield had gained 11 basis points through September as Fed forecasters now predict even deeper cuts. There is now a 43 per cent chance for another 50-bp cut in November, having been at 37 per cent just one day ago, based on CME's FedWatch tool.