By Mihika Sharma
The Indian rupee continues to trade near its all-time low despite a weak dollar index, declining crude oil prices and healthy foreign portfolio investment (FPI) inflows.
It has traded within a narrow range of 83.92 to 83.99 so far in September, closing at 83.98 on September 10. Likely interventions by the Reserve Bank of India (RBI) have kept the rupee rangebound.
Fed to Start Rate Cuts in September
The dollar index remains weak, around 101.6, down from the 103 level a month ago. The markets expect the Fed to start rate cuts due to easing inflation and a slowing labor market.
In July, the annual US Personal Consumption Expenditures (PCE) inflation rate was 2.5%, below the expected 2.6%. The core PCE inflation, the Fed’s preferred inflation measure, remained at 2.6% for the third consecutive month, the lowest in three years.
During the recent Jackson Hole Symposium, Fed Chair Powell indicated that with inflation easing, the Fed is paying more attention on labor market conditions and expressed concerns about a cooling labour market.
However, recent data suggests that the labor market is not cooling sharply, reducing the need for aggressive rate cuts.US nonfarm payrolls increased by 142,000 in August, below the forecast of 160,000 but higher than a downwardly revised 89,000 in July. The unemployment rate edged down to 4.2% in August from 4.3% the previous month.
The market is currently pricing in a 69% chance of a 25 basis point (bps) Fed rate cut at the September 18 meeting and a 31% chance of a 50 bps rate cut.
Demand Concerns Weighing on Oil Prices
Brent crude oil prices have dropped 12% so far in September, reaching USD 69.7 per barrel on September 10, their lowest level since December 2021. The decline is largely attributed to concerns about demand.
Recent data from China, the world’s largest oil importer, points towards a fragile recovery in domestic demand. China’s total imports rose by 0.5% year-on-year in August, falling short of the 2.0% growth forecast and significantly down from a 7.2% rise the previous month.
Additionally, the Organization of the Petroleum Exporting Countries (OPEC) has revised its global oil demand forecasts downward. It now expects global oil demand to grow by 2.03 million barrels per day (bpd) in 2024, lower than previous month’s forecast of 2.11 million bpd.
The 2025 global demand growth estimate has also been lowered to 1.74 million bpd from 1.78 million bpd. These demand concerns are overshadowing supply worries related to the Tropical Storm Francine in the Gulf of Mexico.
Healthy FPI Inflows
Domestically, net FPI inflows have been strong so far in September. Up to September 10, net FPI inflows totalled USD 4.1 billion, surpassing the USD 3.0 billion recorded for the entire month of August. Equities attracted USD 1.7 billion, while debt instruments received USD 2.1 billion, supported by India’s inclusion in the JP Morgan bond index.
US Inflation Data in Focus
This week, US Consumer Price Inflation (CPI) data will be a key focus. The data is expected to show that inflation continues to cool sustainably towards the Fed’s 2% target, supporting expectations of Fed rate cuts.
Additionally, developments related to the upcoming US Presidential elections will be closely monitored. Any shifts in market sentiment after the Presidential debate could lead investors to adjust their positions accordingly.
We expect the rupee to trade within a range of 83.60 to 84.10 in the near term. Approaching Fed rate cuts, along with lower oil prices and FPI inflows, may offer support. However, importer demand could exert pressure on the rupee. We expect the RBI to intervene on both sides, as needed, to contain any volatility in the rupee.
(About the Author: Mihika Sharma, Associate Economist at CareEdge Ratings)
(Disclaimer: Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)